Research And Empirical Study On Convertible Bond Pricing

Convertible bond is a financial instrument that combines the characteristics of debt,stock and derivative.In 1843,the western convertible bond market started,however China’s convertible bond market started in 1990 s,nearly 150 years later.With the continuous improvement of China’s convertible bond market management system and the continuous accumulation of management experience,China’s convertible bond market has gradually moved towards prosperity.The scale of the convertible bond market is growing,and the importance of solving its pricing problem is becoming increasingly prominent.This paper focuses on the pricing of convertible bonds,with the aim of finding a pricing method suitable for China’s convertible bond market.In this article,the history and current status of China’s convertible bond market,basic terms,characteristics and types are elaborated.By reading large number of domestic and foreign literature materials,I give a summary of models and methods commonly used in pricing of convertible bond.At the same time,based on the pricing framework of Dubrov and Bella(2015),I adjust the LSPI pricing model(Least Square Strategy Iteration)for Chinese convertible bonds and do some empirical analysis.In the process of empirical research,combining with the situation of China’s convertible bond market,I select eight convertible bonds issued by commercial banks as pricing samples.I use historical volatility method and GARCH(1,1)method respec tively to estimate the volatility of underlying stock price.Then I use the LSPI model and LSM(least squares Monte Carlo)model to price the samples.According to the pricing results,I can conclude that GARCH(1,1)method gives a more accurate estimate o f the volatility of underlying stock price and makes the pricing error smaller.Compared with LSM pricing model,the LSPI pricing model has smaller pricing error and more stable pricing error.Finally,I point out the shortcomings and improvements of the pricing models.Both methods fail to solve the problems of convertible bond downward revision clause,conversion price adjustment and basic stock dividend payment.Moreover,the assumptions of stock price volatility and risk-free interest rate are too idealistic.Making stock price volatility and risk-free interest rate randomized can improve the validity of pricing model and reduce the error rate.So,the pricing model can be better used for the pricing of China’s convertible bonds.