Convertible Bonds Pricing Based On The Extension Of LSM Model

Convertible bond is a complex financial derivative product with dual characteristics of both bonds and options.The issuer uses different terms and conditions to meet its own financing needs,and investors obtain the optimal benefits by exercising different terms and conditions.The flexibility of this height has made a bigger challenge in the rich capital markets,and with accurate estimates of the price of debt.This paper firstly introduces the definition of convertible bond,the research status of convertible bond pricing theory at home and abroad,and the specific development and development characteristics of domestic convertible bond market.Then,it mainly focuses on the problem of convertible bond pricing.The main research content includes analysis of the main factors influencing the convertible bonds pricing,introduction and analysis B-S pricing model,the binary tree model and the least squares monte carlo model(LSM)in their respective advantages and disadvantages of convertible bonds pricing.Based on the above analysis,this paper argues that the most important feature of convertible bonds in China is that:(1)convertible bonds can be converted in advance,namely,the particularity of American options;(2)There are complex redemption terms,downward revisions and resale terms,and the trigger conditions of these terms are path-dependent.We choose LSM model to carry out empirical research on convertible bond pricing.In the empirical part,this paper firstly compares the pricing efficiency of the classical LSM model and the extended LSM model,and the empirical results show that the extended LSM model considering the downward revision clause is more suitable for China's convertible bond market.Subsequently,based on the actual situation of China's market,this paper further improved the extended LSM model from the following three aspects.Firstly,the stock yield distribution of convertible bonds is considered as the peak and thick tail phenomenon,and the GARCH(1,1)model is used to replace the historical volatility method to re-estimate the stock volatility of convertible bonds.Second,convertible bonds in China,the underlying stock price limit policy,introducing the idea of Merton jump diffusion model,and use the su-juan pan,shi-yin li(2011)research results to jump amplitude limit,thus more accurately described in accordance with our country market share price volatility.Third,based on the convertible bond issuer downward revisions in actual market shares of frequency,downward revisions in terms the trigger condition adjustment model,the improved pricing model for the terms of the revised down approach is more in line with market reality.Finally,through empirical evidence,the improved LSM model improves the efficiency of convertible bond pricing.