An Empirical Research On The Effect Of The Stock Market And The Bond Market On The Chinese Convertible Bond Market

As a financial product, convertible bond’s biggest feature is that it has both stock and bond properties. After 100 years of development and improvement, it is quite mature and plays an important role in developed financial markets such as the United States. Convertible bond was introduced into China in the early 1990s and it is still in its infancy. Chinese convertible bond market develops very rapidly and attracts more and more attention. In China, the demand for convertible bond is growing. This financial product has a great potential in the Chinese market. The features of the current China’s convertible bond market are small scale, few products and inadequate mechanisms. Chinese investors do not fully understand this product.Based on the characteristics and value composition of convertible bond, starting from its double properties as stock and bond and cutting from the market level, this thesis uses empirical methods to research and compare the effects of the stock market and the bond market on the domestic convertible bond market. Then we can have a more profound understanding of convertible bond’s double properties.Firstly, this thesis studies the effects of the stock market and the bond market on the convertible bond market from the long term perspective. With index prices to represent the overall situation of the relevant markets, this thesis uses ADF unit root test, Granger causality test, Vector Auto Regression model, Impulse Response Function and variance decomposition to research and analysis the relevant issues involved in this thesis. Secondly, according to the kinds of stock market states, namely bull market, bear market and low running market, this thesis divides the total sample interval into three subsample intervals and uses the former methods to research and analysis the relevant issues in the three subsample intervals respectively.The conclusions of this thesis are:(1) In the long run, the stock market has a very strong effect on the convertible bond market and they change in the same direction, while the bond market almost has no effect on the convertible bond market. (2) When the stock market is in a bull market period, then the effect of the stock market on the convertible bond market reaches the strongest and they change in the same direction, while the bond market almost has no effect on the convertible bond market. (3) When the stock market is in a bear market period, then the stock still has strong effects on the convertible bond market, the latter changes in the same direction with the former. The bond market still has no effect on the convertible bond market. (4) When the stock market remains low, then both the stock market and the bond market have effects on the convertible bond market, the latter changes in the same direction with the former two. But the effect of the stock market is stronger than that of the bond market. Finally, based on the results of the empirical research and the actual situation of the Chinese market, this thesis provides policy advice and investment strategy recommendations.