Empirical Research On Dynamic Transmission Between Convertible Bonds Market And Stock Market

Convertible bond is an important investment instrument and financial asset in the capital market. As its low-cost financing and risk elusion function, it is favored by financing and investors. Convertible bond has occupied an important position in developed capital market. In recent years, China's convertible bonds market has developed rapidly, it is still asymmetric with the rapid development of the stock market. Along with the further development of the stock market, there is an urgent need for innovative financing channel, convertible bonds just play this role. Therefore, it is necessary to expand convertible bonds market and coordinate stock market for further improving China's capital market.Convertible bonds as an intermediate financial asset, and the prosperity of the market system will be very conductive to the development of China's capital market and the elusion of financial risks. The studies of dynamic conduction relationship between convertible bonds market and the stock market is very useful to analyze the volatility of the two markets dynamic transmission mechanisms, as well as the risk pricing mechanisms.Through Co-integration analysis, Granger Causality Method, Error Correction Model(ECM), Vector Autoregressive (VAR), Impulse response function, and bivariate GARCH model, we research the dynamic transmission relationship between the convertible bonds market and the stock market in China.With the exception of the first chapter, which is an introduction of this paper, and the second chapter, which is a review of convertible bonds research literature at home and aboard, the contents of the dissertation will be divided into three parts as follows:The first section: Co-movement theory between convertible bonds and stock market. Firstly, on the basis of theoretical relation between convertible bonds and its underlying stock, we find there is a non-linear relationship between the price of convertible bonds and its underlying stock. Secondly, as convertible bonds and stocks are financial assets, they are subject to company fundamentals, macro-economic environment and market factors. This also induces the co-movement between convertible bond market prices and stock prices.The second section: Empirical research on dynamic relation between convertible bonds market and stock market. Firstly, we analyze the co-integration relationship between the convertible bond market and the stock market. From the trend line of convertible bonds index and HS300 index, we will find there is a strong correlation. Through unit root test we confirm the order of integration of two index series and their corresponding return rate series. The results show that the two index series are I(1) and the corresponding return series are stationary series. By Engle-Granger two-step method co-integration test which is based on the regression residual, we find that there is a co-integration relationship between the convertible bond index and HS300 index, this means they have the same trend. On the basis of co-integration test, we set up ECM of the two indexes, the co-integration equation and ECM equation of corresponding return are given. Looking at the long term, they are stable, their trends are restricted by the above co-integration equation. But Error correction model shows the return rate of convertible bond are affected by the short-term fluctuations of return rate in stock market and the impact of long-term balance.Secondly, we set up a Vector Autoregressive Model to study the impact relation between the two markets. The result of Granger causality test shows that the stock market has a significant Granger causality effect on the convertible bonds market, but the convertible bonds market has not a Granger causality effect on the stock market. The co-movement characteristic is caused by the transmission between stock market and convertible bond market. We use the impulse response function to analyze the time lag of effect from one market to another. We will find the impact of stock market to the impulse of convertible bond market is relatively small, at the first stage, there is a negative adjustment, and latterly there is a positive adjustment, but the impact of convertible bond market to the impulse of stock market is strong.Finally, to find the co-integration relation between the price of convertible bonds and their underlying stocks, we select 17 convertible bonds from the listed convertible bonds in China, which include 9 unlisted or redeemed convertible bonds: BaogangC.B., GehuaC.B., YanjingC.B., Minsheng C.B., Zhaohang C.B., Kainuo C.B., Jinniu C.B., Shaogang C.B., Shangdian C.B. , and 8 still listed convertible bonds: Haihua C.B., Jinying C.B., Julun C.B., Xiye C.B., Guiguan C.B., Zhonghai C.B., Chengxing C.B., Chuangye C.B. . The results show that there is not co-integration relation between only Chuangye C.B., Baogang C.B., Zhonghai C.B. and Gehua C.B. and their underlying stocks. But the rest have the co-integration relationship.The third section: The empirical research on volatility relation between convertible bonds market and stock market. Most researches on the relationship among different market mainly study correlation between different market indexes time series. However, through the parallel observation of different market trends or co-movement characteristics, or by the analysis of lead-lag relation among multivariate series, we can't accurately find the dynamic relationship among different market price fluctuations. So we use bivariate GARCH model to describe the volatility correlation between convertible bonds market and stock market, and to model their return rate's conditional variance and co-variance dynamically. The results show that the two markets have strong volatility correlation, the volatility of stock market is stronger than the convertible bonds market.