Study Of Correlation Between Convertible Bond Market Price And The Underlying Stock Price

In recent years, Chinese convertible bonds market has been developed rapidly, influenced increasingly on the finance market and economic, and is asymmetric with the rapid development of the stock market. With further development of the stock market, a demand of innovation of financing channels is become urgent, and the convertible bond is just suitable for this requirement. Therefore, to promote the development of the convertible bond market and the stock and securities market through the development of the convertible bond market is meaningful significance. This paper focuses on the inter‐relationship between market prices of the convertible bonds and the underlying stock. By studying the relationship of the fluctuation of prices between the two markets, it can not only learn about the volatility and risk of the Chinese convertible bonds market, but also provide the correct investment suggestions to the investors by using the linkage relationships between convertible bond market price and the stock market price.Focus on the correlation between the convertible bonds market price and the underlying stock price, this paper empirically tested21currently being traded convertible bonds and their underlying stock market prices by using the Granger causality test method. By classifying the test results, this paper found that there is a great deal of difference in the correlation of the convertible bond market prices and the underlying stock price. The differences of the issuances of the convertible bonds will cause different outcomes of the causal relationships between the underlying stock prices and the convertible bond market prices.According to this test result, we use market volume as an alternative to the issuance of convertible bonds and retest the relationships of the market volume, the market price and the price of the underlying stock by using the Granger causality test method, and classify the results. Meanwhile, this paper uses the structures of the holders of the convertible bonds and the underlying stock’s shareholder to analyze the test results again.According to the outcome of the research and analysis, this paper argues that the interaction of the convertible bond market price and the underlying stock price is significant different due to the differences of the issuance of convertible bond and the structure of shareholders. The convertible bond market prices with large issuing scale show a one‐way Granger causality relationship with its underlying stock prices. The mid‐size issuance of convertible bond and its underlying stock price shows no Granger causality relationship between each other. Small size issued convertible bonds, which are vulnerable to the impact of the market fluctuation, represent a great different test result of Granger causality test between its market price and the underlying stock price.