A Research Of Convertible Bond Pricing Based On Investor Sentiment

Academia and practice circle study on convertible bonds in China mainly focus onpricing. And many studies have found underestimated problem of convertible bond value inChina. Due to the efficient market hypothesis is too simple, it cannot fully explain thephenomenon in real financial market. And we need to use behavioral finance theory to studythis problem. Therefore, this article makes a further study of investor sentiment andconvertible bond pricing by a case study of PING AN convertible bond, which has publiclytraded in December2013(stock code:113005).Firstly, after making a detailed introduction, this article uses the extended least squaresmonte carlo method for pricing of PING AN convertible bond after putting forward somehypotheses under the terms of the PING AN convertible bond issue, and found:(1) theunderestimated rate of PING AN convertible bond on the date of issue is15.79%;(2) theaverage underestimated rate of PING AN convertible bond after going public is15.79%.Secondly, this article focus on the analysis of investor sentiment and underestimatedproblem of PING AN convertible bond value, and builds the extended least square montecarlo based on investor sentiment pricing method. After empirical testing, this articleconcludes:(1) when the discount rate is overly optimistic, investors will underestimate thediscount rate, thus overestimate the value of PING AN convertible bond value;(2) when thediscount rate is overly pessimistic, investors will overestimate the discount rate, thusunderestimate the value of PING AN convertible bond value;(3) when the stock pricevolatility is overly optimistic, investors will underestimate the stock price volatility, thusunderestimate the value of PING AN convertible bond value;(4) when the stock pricevolatility is overly pessimistic, investors will overestimate the stock price volatility, thusoverestimate the value of PING AN convertible bond value;(5) Now, overly pessimisticdiscount rate and overly optimistic stock price volatility is one reason of the underestimatedproblem of PING AN convertible bond value. And pricing based on investor sentiment iscloser to the market price.Finally it is concluded the case enlightenment:(1) to investors, the motive of issuingconvertible bond in China’s stock market is “back door equity, so it is similar to the secondaryofferings, and usually there will be a secondary discount, investors should actively purchase.In addition, if we can estimate the sentiment of the current state of the market of mostinvestors more accurately, buck the trend can be used for investment operation mode, so as toobtain a higher return on investment;(2) to issuer, a certain amount of secondary offerings isbeneficial to reduce the failure probability of convertible bonds issued, and estimating thesentiment of the current state of the majority of investors in the market is helpful to selectappropriate timing;(3) to regulators, underestimated problem of convertible bond value inChina reflects the market is not completely effective to a certain extent, it needs to improverelevant systems and regulations, so as to improve the efficiency of the convertible bondmarket in China.