Pricing Chinese Convertible Bonds with Learning-Based Monte Carlo Simulation Model

Abstract

In this paper, we explore a novel model for pricing Chinese convertible bonds that seamlessly integrates machine learning techniques with traditional models. The least squares Monte Carlo (LSM) method is effective in handling multiple state variables and complex path dependencies through simple regression analysis. In our approach, we incorporate machine learning techniques, specifically support vector regression (SVR) and random forest (RF). By employing Bayesian optimization to fine-tune the random forest, we achieve improved predictive performance. This integration is designed to enhance the precision and predictive capabilities of convertible bond pricing. Through the use of simulated data and real data from the Chinese convertible bond market, the results demonstrate the superiority of our proposed model over the classic LSM, confirming its effectiveness. The development of a pricing model incorporating machine learning techniques proves particularly effective in addressing the complex pricing system of Chinese convertible bonds. Our study contributes to the body of knowledge on convertible bond pricing and further deepens the application of machine learning in the field in an integrated and supportive manner.