Empirical Study Of Convertible Bonds Pricing And Trading Strategy In China Market

Convertible bond is a kind of bonds with options for the holders who can convert the bond to stocks under some conditions.For the issuer,convertible bond is a 'low cost,high stability' choice of financing.While for the investor,convertible bond is a'low risk,high potential' investment product.Convertible bond play an important role in the financing activities of high-tech enterprises in America.In constant,convertible bond market in China has a huge development space under the economic transition period.In the year of 2017,convertible bond market could usher in an era of rapid development.Before we give great impetus to develop convertible bond market,we should have a clear comprehensive cognition of its pricing,market efficiency,return and risk of investment.This paper focus on the study of convertible bond issuer behavior,the pricing model,market discount or premium phenomenon,delta hedging strategy,the speculation,arbitrage strategy and risk management,aim at seeking a pricing model with both effect and efficiency for China,then provide a mature and feasible reference for investors,and achieved some progress.First of all,the paper does statistical analysis of convertible bond classic settings of call provision,put provision,reset clause and the issuer behavior after these terms be triggered.Secondly,the paper improves the algorithm of LSM under the full consideration of convertible bond provisions.Thirdly,the article propose a point that convertible bond value is reliable of the underlying stock's historic pathway,then use a two-value choice panel model test the influence factors of the market discount or premium phenomenon.Fourthly,the paper does some study of the algorithm of convertible bond delta and the hedging strategy in order to improve hedging effect.Last but not least,the paper shows the return and risk characteristics of convertible bond speculation,buy-and-hold,buy-and-hedge and arbitrage strategy,shows how hedging strategy works in the convertible bond trading and risk management.The statistical analysis shows that the call announcement period is always about 20 trading days,and most of issuers would not revise the conversion price until the put provision is close to be triggered.The empirical research shows that reset clause has great influence of the convertible bond theoretical value,while put and call provision less.Stochastic risk-free rate and stochastic volatility have small influence of the convertible bond value,as well as the conversion policy of investors.While the maturity decrease under same conversion value,the convertible bond value first increase then decrease.In put period or not,the underlying stock price,the recent yield and volatility,the funds-hold percent have strong influence of market discount or premium phenomenon.Moreover,the paper shows that enlarging the volatility,which is used to calculate the hedging delta,will improve hedging profit and effect.The optimized hedging strategy that the paper put forward,combine the strength of static and dynamic hedging,and really do a good job in the convertible bond arbitrage strategy and risk management practice.