Analysis And Empirical Study Of The Convertible Bond Pricing Based On LSM Model

Convertible bonds are a complex financial derivative that combines the properties of stocks,bonds,and options.The issuance of convertible bonds by a company can reduce the cost of financing,and investors can purchase convertible bonds to obtain potential high returns through the exercise of convertible equity.Compared to the mature convertible bond market abroad,the domestic convertible bond market started relatively late.In addition,there are certain special terms in the Chinese market,making the pricing of convertible bonds in the domestic market more complex.Therefore,it is of great significance to study the pricing methods of convertible bonds based on the current situation of China’s financial market.This article first introduces the basic definition of convertible bonds and the redemption,repurchase,and downward revision clauses related to convertible bonds.It introduces the development process of Chinese convertible bonds,analyzes several commonly used convertible bond pricing methods and believes that the Least Squares Monte Carlo Simulation(LSM)method is a pricing method suitable for the current situation of China’s financial market.This article uses Monte Carlo method to simulate changes in stock prices and makes improvements on the LSM model to make the improved model more suitable for the Chinese financial market.The main improvements include replacing historical volatility with random volatility,estimating parameters of random volatility using MCMC method,and adjusting the algorithm based on convertible bond terms in the Chinese market,ultimately establishing a suitable pricing model.Based on the improved LSM model,this paper analyzes the pricing of Shenghong convertible bonds in the domestic market and uses the binary tree model to analyze the pricing of Shenghong convertible bonds,compares the accuracy of two models.This paper selects 15 convertible bonds with the Shangyin convertible bonds as the sample,and carries out LSM model prediction and binary tree model prediction at the same time.After empirical demonstration of all convertible bonds samples,this paper believes that the accuracy of LSM model pricing is higher than binary tree model,which is a pricing model closer to the Chinese market.