Research On Quantitative Investment Strategy Of Convertible Bonds

Convertible corporate bonds refer to bonds that can be converted into designated stocks(i.e.,"equity")at a set price for equity conversion within a certain period of time.Convertible bonds have the characteristics of both debt and stock,playing an important role in the capital market.The unique feature of convertible bonds makes it rather popular among issuers and has gained different applications in the capital market.Recently,the United States has launched a trade war with China.Considering the strong expectation of US dollar interest rate to rise and the high volatility of RMB,the stock market may face considerable volatility adjustment pressure in the short term.However,the monetary policy focus of the central bank has turned to prevent the market from falling sharply and reduce the overall impact of the trade war on the Chinese economy.In such environment,the value of convertible bonds is appreciated by investors.Relying on the existence of the bottom of the debt,convertible bonds show the power of resistance and little room for overall decline.On the other hand,in a bear market,issuers often choose to revise down the conversion price in the face of the continuous decline of underlying stocks,which will improving the value of convertible bonds and enhancing their anti-risk ability.Under such background,this paper,from the perspective of quantitative investment,studies the convertible bond investment strategy in the secondary market and selects the best strategy through compareing the investment returns and risks of each model.This paper makes a strategy combining bonds selection and timing selection.In terms of bonds selection,this paper builds a convertible bond pricing model which can compute the intrinsic value of convertible bond.Then,we can compare the intrinsic value and market price of convertible bonds,so as to find undervalued convertible bonds and build a position.This paper takes Monte Carlo simulation method as the framework to price convertible bonds.Compared with the previous studies in this field,this paper mainly innovates three parts,which are conversion clause pricing,downward revision clause pricing and volatility.First of all,in order to pricing the conversion clause more accuratly,the article modifies the traditional LSM model.Secondly,this paper finds that the reasons why the issuers choose to enforce the downward revision clause changed with time and market environment.Therefore,this paper renew the relevant assumptions and constructs new pricing model.Finally,this paper analyzes three types of volatility.Those are,the historical standard deviation,the implied volatility and the volatility predicted by the NGARCH model.In the end,we proved that the NGARCH model is more suitable to price convertible bonds.When it comes to timing,this paper builds a timing model of convertible bonds by analyzing the characteristics of convertible bonds and combining the momentum effect.Finally,this paper combines the convertible bond pricing model with the timing model to construct the convertible bond quantitative timing and debt selection model.