Study On Pricing Efficiency In Chinese Convertible Bond Market

The Convertible Bond (CB) is a rather complicated credit derivative. Besides the common debt, it includes many options, such as conversion option, call option, put option and option to lower the conversion price. Scholars in China have conducted many researches in CB pricing, most of them focus on the first day of the CB issuing. Pricing results show that, on the first day of the CB issuing, CBs are significantly underpriced comparing with theoretical prices.Firstly, the paper used qualitative analysis on convertible bond clauses, the development of the convertible bond market, both inside and outside China, and the convertible bond pricing theory. Based on the result of Zheng and Lin(2004a), I price the whole life of Chinese CB, using model of Chinese CB pricing and estimating parameters.The results show that, CBs are significantly underpriced in the period of non-conversion,but in the period of conversion,real prices dynamically converge to theoretical prices.Furthermore , the CBs are overpriced in some periods.Then based on those results, we further investigate the rationale behind underpricing,by qualitatively and quantitatively techniques from a more general view. Regarding to the aspect of qualitative analysis, we thought that the reason that, CBs in China are being underpriced could be illustrated by some factors. For quantitative analysis, time series analysis technique is initially used to analyze the pricing error of different CBs and the relationships among remaining terms, market returns and returns on underlying stocks. It is obvious to conclude that the pricing error of different CBs has positive correlation with remaining terms while it has no obvious correlation with market returns and returns on underlying stocks.Then we use cross-section analysis technique to analyze what factors will influence the pricing error of CBs. The result shows that the pricing error of CBs has positive correlation with these factors.