Pricing Analysis Of China 's Convertible Bonds Based On LSM Model

Convertible bond is a complicated financial derivatives, which involves many types of embedded options and is a typical security of path-dependence. With the development of domestic market of convertible bond, researches on reasonable pricing of convertible bond is more and more useful for the issuing corporations and investors to analyze the value of convertible bond. Considering provisions like downward revisions of conversion price, conditional redemption and reclaim, this article used LSM model to do theoretical and empirical analysis on the pricing of convertible bond, and properly improved LSM model to try to predict the future price of convertible bond.This article firstly introduced foreign and domestic theories on the pricing of convertible bond and relative theoretical development of LSM model. Then, after we introduced the basic concept of convertible bond and the market of convertible bond in China, we used LSM model to analyze the pricing of convertible bond in China and the applicability of volatility and credit risk. Also, we improved LSM model on risk-free interest rate and volatility. Finally, through empirical study we obtained the linear regression model as the approximate model of LSM model.The theoretical significance of this article is to find out a pricing model which is suitable to convertible bond in China. And the practical significance of this article is to predict future price of convertible bond using this model and to make correct investment strategy.