Study On The Revelance Between Convertiblle Bonds And Their Basic Stocks

This paper studies the relevance between convertible bonds and their underlyed stocks. Based on theoretical analysis, this paper uses VAR models to study the relevance between six convertible bonds and their underlying stocks, and use the method of event study to investigate the redemption announcement effect ofthirty-four convertible bonds. Granger causality test shows that the returns of BOHUI bonds and XIYE bonds Granger causes their underlying stock returns, while the Granger causality does not exist between the other four convertible bonds and their underlying stock returns. Variance decomposition analysis shows that the change of BOHUI stock is mainly affected by changes of its own and 7% by changes of its bond. the change of BOHUI bond is 58% affected by changes of its own and 42% by changes of its underlying stock; other five bonds is almost independent of the underlying stock, the underlying stock is affected by its convertible bonds up to 20% or more. Impulse response function analysis shows that the changes of BOHUI bonds return has no impact on its underlying stock in the current period, reaches the maximum in the second period and then gradually decay and completely disappeared in the third period. The changes of BOHUI stock return has positive impact on its bonds in the current period, decay rapidly in the subsequent period and completely disappeared in the third period.The changes of other five bonds have a significant impact on their underlying stocks in the current period, decay rapidly in the subsequent period and completely disappeared in the third period, the changes of five stocks almost have no impact on their bonds.Event study analysis shows that the cumulative average abnormal of stock returns showed a downward trend after the redeemption of convertible bonds, in the short term during the period of [0,1] the average cumulative abnormal returns was 0.634%, in the medium term [0, 15] and [0,30] cumulative abnormal return rate was repectively -0.195% and -0.842%. These phenomena can attribute to the asymmetric effect of Chinese stock markets and seller pressure caused by cash conversion.