VaR Risk Management Of Convertible Bond Investment Based On Laplace Distribution

As the development of China's capital market, convertible bond has become one of the Innovative Financial Products, because of its double function in financing and hedging. But most of research focused in its pricing or effect of issue notice, research on its investment and risk management is still scarce.VaR is necessary in management of convertible bond. The volatility of financial asset and the catastrophic effect brought by financial disasters display the importance of financial risk management. Value at Risk has been widely used by international financial institutions for it is the main instrument in financial risk quantization, and it is attempted a lot in China, but almost used in stock market, research about returns feature and VaR management in convertible bond market is few. This paper will do comprehensive study in these. The main conclusions and impossible innovations are as follows:1. Analyze the basic situation of convertible bond in China, and note this derivatives' invest value in hedging and arbitraging under present one-way trade and two-way trade in future. The focus is the analysis of arbitraging, which based on the spread between conversion parity and stock price, according to the arbitraging principle in future market. Then give examples to explain that operation and value.2. The characteristics in returns and volatility of convertible bond with its stock are Compared researched, provide that bond's return is smaller than its stock, but have more sharp kurtosis and much heavier tail. Then Laplace distribution isintroduced to fit their returns. According to Pearson- X~2 testing and comparison,Laplace distribution fitting's advantage and feasibility in solving sharp kurtosis and heavy tail is proved, and this provides basis for VaR risk value analysis.3. Derivate out an new method of VaR computation based on Laplace distribution, then do empirical analysis for some convertible bonds and compare the result with other common methods to prove the feasibility of this new method, this also provide reference to the effective measurement of risk in China's convertible bond market.