Convertible Bond Quantitative Investment Strategy Based On Estimation Error

Convertible bonds are a special kind of corporate bonds.In addition to receiving fixed income like ordinary bonds,the holders can also convert them into corresponding stocks at the conversion ratio within a certain period of time,so convertible bonds have the attribute of option.In recent years,the size of the convertible bond market has continued to rise.The demand of investors for fixed income is no longer limited to traditional bonds,the property of stock right and bond right embedded in convertible bonds provides investors with more choices.Especially in the past three years,the convertible bond index has outperformed the stock market index for a long time.Based on the booming development of the convertible bond market,this paper begins with the valuation model of convertible bonds to study feasible quantitative investment strategies in real transactions,and to find underestimated convertible bonds,so as to try to earn stable excess returns.This paper first reviews and analyzes the classic valuation models at home and abroad of convertible bonds.An excellent valuation model should be able to mine underestimated convertible bonds to earn excess returns.In these conditions,this paper combines the real situation of domestic convertible bonds,based on the B-S valuation model,and selects a quantitative strategy that can select underestimated convertible bonds.The difference between the implied volatility reversed by the B-S model and the historical volatility of the corresponding underlying stock can reflect the degree of under valuation by market.The backtest found that the excess returns is not very stable.The main reason is that when the market falls,the theoretical valuation and real price will also fall,resulting in the disappearance of excess returns.The domestic convertible bond market has autocorrelation,so the momentum effect can be used to reduce the risk of the strategy,avoid the losses caused by the market decline,and set a simple timing signal to empty position.Finally,this paper uses the stock-oriented convertible bonds with an upward trend in the short term as the screening pool,and selects the undervalued convertible bonds to trade.The results of this paper confirm that,on the basis of momentum timing,by screening out undervalued stock-oriented convertible bonds,it is possible to effectively obtain stable excess returns,and also overcome the downside risk of strategies in extreme markets.It provides reference value for investors to construct the valuation model and trading strategy of convertible bonds in the real market.