Pricing Research Of Convertible Bonds In China And The Analysis Of Convertible Bond Underpricing

As a kind of mixed financing tool, convertible bond is widely used in worldwide financial market. However, the convertible bond market in China has been through many difficulties due to many reasons. The present convertible bond market in China has smaller size, narrower industry distribution, simpler provision design and lower yield rate comparing with more developed convertible bond market such as America and Japan. On the other hand, convertible bond has huge attraction to investors especially at the background of financial crisis since2007. So the prosperous and development of Chinese convertible bond market will benefit the Chinese financial market and defuse financial risks. As a result, it is meaningful to analyze the convertible bond in China and its pricing problems.Since the seventies in last century, the scholars in many countries have tried to price the convertible bond using so many method and models. Among these methods, Black and Scholes (1973) has provide a stochastic pricing model, which has been the base of the pricing method for convertible bond. Scholars has improved and developed these methods. For example, Tsiveriotis and Fernandes (1998), as well as Ayache, Forsyth and Vetzal (2003) has provide the structural simplified model. What’s more, many scholars have used binomial tree model, Mote Carlo method and finite difference method to price convertible bond. By using these methods, it has been proved that convertible bonds are widely underpriced. That means the theoretical prices of convertible bond are generally higher than their true market prices. The scholars has studied and analyzed the reason of convertible bond under pricing from many aspects while it has no final verdict yet. On the other hand, the pricing methods for convertible bond are varied and no one has extinct advantages. The Black-Scholes model got the most support and was most widely used. Beside the strong theoretical foundation and wide applicability, the B-S model is a kind of analyzing pricing method. So it has clear parameters and expression for hedging and leverage effect. It can provide specific rational and qualitative result for convertible bond trading strategy. On the other hand, different from numerical method, the analytical result has no error. Otherwise, the B-S model is more appropriate to price convertible bonds with a small number. The listed convertible bonds in China are not so many so they can be priced exactly and properly using B-S model.The study of convertible bond in China started late. At present the studies of convertible bond pricing, especially demonstrated studies are not so general. This paper tries to price the22convertible bonds listed in China by late on June25in2013by using B-S model. The result shows that it can be priced exactly by using the B-S model for the fluctuation trend of theoretical price is similar with the market price. In addition, the14of the22convertible bonds are underpriced, which means their theoretical prices are significantly higher than their market prices. So the convertible bonds in Chinese market are generally underpriced as the same with the result of other scholars. Considering other specific provisions, the theoretical price of convertible bonds will be much higher than the market prices, which will lead some non-underpriced convertible bonds become underpriced due to the higher theoretical price. So the under pricing phenomenon on convertible bond market will be more general. Even though there are almost one third of convertible bonds in this paper non-underpriced, we can still make the conclusion that the under pricing phenomenon on Chinese convertible bond market is at large. On the other hand, this paper still has some disadvantages. The select of model parameters has significant effect to the result and is easy to cause pricing errors. For example, there are many ways to calculate the volatility rate and there are many risk-free rates available. The different selection will lead to different results. Otherwise, the Chinese convertible bond market is still in the development stage, so the rating system is not perfect, which may make the wrong risk-free risk and affect the correctness of convertible bond pricing.