The Applicability Of Fama-French Three-factor Model In The Chinese Convertible Bonds Market

Convertible bond is an important financing tool, which has the basic properties of ordinary debt servicing and can be converted into ordinary shares of listed companies. Therefore, it is widely believed that the convertibles own the characteristics of bond and the option, In general, with the existence of the embedded call option, the convertible bonds coupon or fixed interest rate is low, from the point of the bond, its financing cost is lower compared with the common bond.Pricing of domestic convertible bonds is focusing on the nature of convertible bonds and options, the main method is to separate pricing and binomial tree method, the former is priced on the basis of the discounted cash flows of the bond plus option value.however, it is difficult to separate the pricing formulas on the conditions that the investors also have the rights to sell the bonds back to the issuer; The latter simulates the price of the stock which can fully takes into account the variety of terms, but it is difficult to find the systematic characteristics of the convertibles market.This article take Fama-French (1993) approach to building scale factor and the book to market factor, and the samples were grouped combined premium income model to explain the degree of risk for each combination of relatively high. Some of them are affected by a combination of market factors influenced in part by a combination of a smaller market factors. The third part compares different models. In this paper, We got the empirical results of the three models, obtaining the characteristics of convertible bonds in Chinese market is similar to the stocks rather than bonds. During CAPM model fitting, we find that BL group risk premium is lower than the carrying amount of the market value and SL group(generally regarded as a combination of the growth of such companies) can be explained by CAPM model to achieve better results, indicating that there are a large part of the company subjected to market risks.Pricing these companies should focus their systemic risk with respect to the valuation of equity markets. On the other hand, the trend of high book convertible bonds portfolio appeared opposite momentum with the market trend, which shows the value of the company’s convertible bonds become a hedging tool for investors.According to empirical results,we can get some conclusions. First, the pricing method and binary separation method is suitable for short-term pricing, not for systematic analysis; Secondly, characteristics of convertible bonds market share significantly, the use of FF three-factor model can achieve better results explained; third, China’s convertible bond market varieties with large companies, high book-market ratio effect, that large companies, high book-market ratio seems to have a high long-term yields, which is due to the preferences of the convertible bond investors; fourth, the negative beta of some groups implies that some Investors use convertible bonds as a hedging tool.