Research On Contingent Convertible Bonds Pricing Method For Restricting Manipulative Behavior

Contingent convertible bonds are new financial derivatives which are aimed to solve "too big to fail" problem. They reduce the government’s pressure, increase capacity of loss absorption for financial institutions. Because contingent convertible bonds did not emerge too long, they face the impact of manipulation in the stock market. The behavior is not only unhealthy for their development, but also unhelpful to attract investors’interests in them.Under this background, this paper focuses on trades’potential manipulative behavior which is based on market trigger and conducted by trading behavior to get profit from it by making a forced conversion. Firstly, by designing a type of contingent convertible bonds which are premium conversion of fixed number shares, it can reduce the manipulative behavior through setting a fixed value; by designing double market triggers which are including institution index and stock price, it can decrease the abnormal change of volatility which is brought by trading behavior, thereby it can restrict participants’manipulation. Secondly, based on the principal of balance, we deduced the conversion ratio which is the same whether the participants manipulated or not, that is the fixed number of conversion, and get the result by simulation that the conversion ratio which can restrict investors’ manipulation decreases with the decrease of remaining time to contingent convertible bonds’ maturity, it is negatively correlated with the growth rate of stock price, and positively correlated with the interest rate of contingent convertible bonds. Finally, we apply derivatives method to price this kind of contingent convertible bonds, get the result by simulation that its value is negatively correlated with the premium level and stock volatility.This paper improves the proposal in the contingent convertible bonds to restrict traders’ potential manipulation. It meets the needs of investors and issuers under the premise of accurate pricing, and achieves the effect of help during crisis. It laid a solid foundation for the further development of healthy and well-established contingent convertible bonds market, and also provided reference for our country to resolve "too big to fail" problem and reduced the negative effects of extreme financial risks by introducing contingent convertible bonds.