Empirical Analysis Of Pricing Of Convertible Bond In China

In this article, the first chapter, begin with the definition of convertible bonds, introduced the convertible bonds market's history, and did a simple comparison to foreign markets about risks and yield characteristics related to the convertible bonds, and about the terms of convertible bonds. The United States and European convertible bonds are similar in the risk-benefit features. In the bull market, prices of convertible bonds rose when stocks'prices rose; in the bear market, the prices decline much more than stocks'. In China, the risk of convertible bonds is smaller than stock index, and the weekly yield is bigger then the stock index.In addition, a series of provisions make China's convertible bonds have the following characteristics. As pure bonds the value is high. They all have high credit ratings. When issued the premium rate of convertible bonds is low. Prices of converting can be modified downward in a big scope. Converting price changed when cash dividends were given out. Issuers have a strong will to make you convert bonds to stocks.In the second chapter we reviewed some foreign pricing model including single factor pricing model, two-factor pricing model and credit risk pricing model. Single-factor model includes ingredient pricing model, model based on the stock price and based on the value of the company. Two-factor models include model based company's value and the interest rate and two-factor model of stock prices and interest rates.The third chapter officially entered the theme. Firstly I introduced some common valuation method for financial derivative securities. Then I began to analyze our pricing model and select the appropriate one. Finally I chose the credit risk model–the Tsiveriotis and Fernandes (1998) model. In view of the actual situation I did some changes for a series of subsidiary articles.Eventually, the model algorithm, as following: Objectives:Boundary conditions:Then I used Monte Carlo simulation and binomial tree method to solve the model. Section III gives estimates of the parameters in this model. In this paper the estimation methods of price volatility is characteristics. Volatility is estimated to adopt a historical volatility of the stock's price by historical change. Volatility is the standard deviation of stock daily yield. Since convertible bond itself will have an impact on price volatility, it makes generally lower then before. So the volatility before the issuing of convertible bonds can not be used as in the pricing model. Convertible bonds are long-term securities; the volatility should be the long-term average rate fluctuations. If the data of convertible bonds issued after a relatively short time, the estimates could not really reflect the long-term average stock volatility. So we should modify the volatility according to the scale of the issuance of convertible bonds and the market value of the stock. In this paper the assumption is that the rate of modification has a linear relationship with the ratio of scale CB and stock's market value. It is an unprecedented experiment. Risk-free rate estimated from the government bonds market, using the coupon stripping, derived using linear interpolation method term structure of interest rates.Section IV I got the results of the model. It is a widespread phenomenon that China's convertible bonds appeared to be overestimated, range in 6%-20%. It is a rather high degree of overestimation. This can only be attributed to the irrational market. Fortunately, the theoretical prices of convertible bonds have a very significant correlation with their market price. Theoretical price plays a strong role in interpreting the market price. They have a similar trend. Along with the further development of the market, investors will become more mature rational. Perhaps the investors'enthusiasm to convertible bonds decline. However, it is because of convertible bonds'unique advantages in investing, compared to stock and pure bonds. For the final chapter, I made a brief explanation of the reasons of the difficulties in pricing, a simple description of the advantages and disadvantages of the model and prospects to future work. Given the development of convertible bonds market, a big sample of convertible bonds is available. We can get the implied volatility. We could build the regression equation between the implied volatility and stock price volatility. So we can quantify the impact of issuance. Such a relationship for the future pricing work would be a immense help.