Convertible Bond Market Research Articles

The impact of refinancing transaction policy adjustment on stock market volatility

This paper investigates the impact of refinancing transaction policy adjustment on the volatility of convertible bond market. Through GARCH model analysis, it is found that the refinancing policy adjustment significantly affects the spillover effect between CSI 300 index and CSI convertible bond index, indicating that the policy adjustment leads to differences in the speed of market reaction to common information and the degree of change in yield, which reflects the market's sensitivity to the policy change as well as the adaptability of market participants. The empirical results show that the convertible bond market has a significant dynamic impact on the stock market during the policy adjustment period, accompanied by the improvement of market efficiency, which supports the hypothesis that the refinancing policy adjustment has a significant impact on the spillover effect between the two markets.

The lead lag relationship between convertible bonds and stocks: a perspective based on trading mechanism

ABSTRACT Based on minute-level high-frequency data, this paper examines the lead-lag relationship between convertible bonds and the stock market by using the thermal optimal path method. It is found that convertible bonds lead the stock market at both index and individual levels. Regression analysis shows that the unique ‘T + 0’ trading mechanism and wider price limits of convertible bonds significantly contribute to their leading effect. Additional analysis shows that the leading effect is significantly reduced when the price limit of convertible bond market is narrowed. Our findings can potentially help regulators to improve and develop the convertible bond market, and also be of value to investors in developing trading strategies.

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

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.

전환사채시장의 규제 변천사와 정책적 시사점 : 시가하락 리픽싱 옵션과 제3자 지정 콜옵션을 중심으로

전환사채시장의 규제 변천사와 정책적 시사점 : 시가하락 리픽싱 옵션과 제3자 지정 콜옵션을 중심으로

Intermediary frictions and convertible bond pricing

Buy-and-hedge intermediaries are important investors in the convertible bond market as they intermediate between firms that require capital quickly and investors requiring time to assess the security. Their strategy requires them to manage the trade-offs involved with the costs and benefits of hedging. We find that prices of convertible securities reflect the costs that intermediaries incur when managing their positions. Especially cross-sectional and within-bond variation of intermediaries’ loan costs helps explain variation in convertible bond underpricing.

An Empirical Study on the Efficiency of China's Convertible Bond Market

Since 2017, with the increased demand for margin financing and securities lending in the capital market and the improvement of relevant regulations, China's convertible bond market has experienced a boom. As of March 9, 2024, China has issued a total of 823 convertible bonds, amounting to 1.3 trillion yuan. The stock of convertible bonds has expanded from 24 bonds totalling 55.9 billion yuan at the end of 2016 to 553 bonds totalling 853.3 billion yuan. The importance of convertible bonds in the capital market has become increasingly prominent, becoming an essential part of financial tool diversification and market development. However, academic research on the convertible bond market is relatively scarce, mostly focusing on pricing mechanisms, financing effects, and the impact on the underlying stock prices, with little attention paid to the market itself. This paper uses runs tests, autocorrelation tests, and variance ratio tests to analyze the efficiency of China's convertible bond market. By examining whether the daily returns of the convertible bond index follow a random walk, the paper tests if the market is weak-form efficient. The results show that China's convertible bond market has not reached weak-form efficiency. Subsequently, a new index sample was created from the top ten convertible bonds by trading volume in May 2024, and its daily returns were tested for adherence to the random walk model. The results were compared to the overall market's convertible bond index returns in the same period of 2023 to identify factors influencing market efficiency, providing directions and insights for future research.

Study on the Efficiency of China's Convertible Bond Market Based on ARMA-GARCH Models

This study examines the prediction and analysis of China's convertible bond market using a combined ARMA and Generalized GARCH model. If this model can effectively achieve its predictive goals, it indirectly suggests that China's convertible bond market has not yet reached weak-form efficiency. The study focuses on the Shenzhen Investment Grade Convertible Bond Index, utilizing daily closing price data from January 2, 2019, to June 18, 2024, as the sample, providing a robust empirical foundation for the model. Empirical results indicate that the constructed model effectively captures the volatility patterns of current convertible bond yields, implying that historical price data holds certain predictive significance for current prices. Furthermore, through empirical analysis using the GARCH-M(1, 1) model, we find a relationship between yield volatility in the convertible bond market and historical risk levels. This suggests that market risk may not be fully priced rationally, as historical risk levels can help forecast current yield volatility, further confirming that China's convertible bond market has not yet achieved weak-form efficiency

Changes in Early Redemption Rules for Convertible Bonds and an Examination of the Effect of Forced Redemption

In 2022, the Shanghai Stock Exchanges and Shenzhen Stock Exchanges (SSE and SZSE) made a series of amendments to the convertible bond trading rules and self-regulation of listed companies. In addition to this, SSE and SZSE made more detailed requirements on the time and process for listed companies to exercise their rights for convertible bond redemption in advance. By summarizing and analysing the data of convertible bonds listed by the Shanghai Stock Exchanges and Shenzhen Stock Exchanges in China in the past 10 years, this paper introduces the background of the convertible bond market, analyses the characteristics of convertible bonds redeemed early and the impact of early redemption of convertible bonds on listed companies, and explores what kind of forced redemption effect has been produced by the new changes of convertible bond regulations. The paper also explores the implications of the forced redemption effect on investors by considering the changes in the convertible bond market since its inception.

Research on Pricing Model of Chinese Convertible Bonds

This paper aims to create a new model for convertible bond pricing based on convertible bond rules and convertible bond strategies. And based on the concept of value investment, this paper analyzes and deduces various situations of convertible bonds by using future cash flow discount thinking. In addition, two new options that achieve the conditional call price and options that exceed the conditional call price are presented, and a more flexible formulation of the model for computing the price of convertible bonds is derived. However, this model requires the user to have some experience with convertible bonds. This might make a bit of sense for academic development and could help people better understand and participate in the convertible bond market.

Research on Convertible Bond Issuance Program

As of 2023, it has been 32 years since convertible bonds were introduced into China. In 1992, Baoan convertible bonds, as China's first convertible bonds, were issued with an issue size of RMB 500 million, thus opening the door to China's convertible bond market. However, for a long time, due to the imperfection of relevant laws and regulations, the growth rate of the convertible bond market has been very slow, and listed companies prefer equity financing, which makes it difficult for convertible bonds to be implemented on a large scale. However, since 2015, the Securities and Futures Commission (SFC) has issued a series of laws and regulations, including the Implementing Rules for the Non-public Offering of Shares by Listed Companies (2017) and the Notice on Matters Relating to the Reporting of Procedural Transactions of Convertible Bonds (2021), which shows that the SFC intends to promote the standardized development of convertible bonds. As a result, the number and size of convertible bonds have grown rapidly, and convertible bonds have become increasingly popular among low-risk investors. In the increasingly hot situation of the convertible bond market, this paper chooses Jiangnan Water Company as a typical case representative, through the analysis of its convertible bond issuance program, the company's early resale behavior of the motivation and impact to find the problems in the corporate issuance of convertible bonds, and for the future want to issue the convertible bonds of the company to provide the applicable recommendations, the following is the research of this paper to improve some of the measures: choosing the right time of sale; the establishment of convertible bonds early warning system, strengthen internal control; according to the financing project to select the appropriate financing methods, and so on.

Can convertible bond trading predict stock returns? Evidence from China

This paper studies the information content of convertible bond trading in Chinese market. We construct a measure of the convertible bond order imbalance. The analysis shows that the convertible bond order imbalance positively and significantly predicts future stock returns. The results hold in both daily and 30-min frequencies. Our findings are robust by considering the stock price sensitivity of convertible bond. The predictability is of economic significance that the long-short trading strategy based on the convertible bond order imbalance generates an annual return of 17.54%. Moreover, the predictive relations varies with moneyness, conversion premium, limits to arbitrage, level of information asymmetry and maturity. Since stocks are subject to “T + 1” trading rule while convertible bonds are not in Chinese market, convertible bond market provides an alternative venue to gain stock exposures with less trading restrictions. We find that the stock order imbalance exhibits a weaker predictability on stock returns compared to the convertible bond order flows. Our findings suggest that convertible bond market plays an important role in discovering private information of stock prices.

Option features and price discovery in convertible bonds

AbstractIn this paper, we investigate whether the option features in convertible bonds lead to price discovery. On the basis of minute‐level data from January 2019 to December 2021, we find that the convertible bond market contributes to the price discovery of the stock market by using the thermal optimal path method, and that the option features in convertible bonds are an important factor affecting the price discovery ability. Regression analysis shows that the effect of option features remains significant after controlling for a range of variables, such as the size of the convertible bond, the premium rate, information shock, and volatility. In addition, we further explore the impact of the difference in trading regimes between the convertible bond market and the equity market on price discovery.

DeepPricing: pricing convertible bonds based on financial time-series generative adversarial networks

Convertible bonds are an important segment of the corporate bond market, however, as hybrid instruments, convertible bonds are difficult to value because they depend on variables related to the underlying stock, the fixed-income part, and the interaction between these components. Besides, embedded options, such as conversion, call, and put provisions are often restricted to certain periods, may vary over time, and are subject to additional path-dependent features of the state variables. Moreover, the most challenging problem in convertible bond valuation is the underlying stock return process modeling as it retains various complex statistical properties. In this paper, we propose DeepPricing, a novel data-driven convertible bonds pricing model, which is inspired by the recent success of generative adversarial networks (GAN), to address the above challenges. The method introduces a new financial time-series generative adversarial networks (FinGAN), which is able to reproduce risk-neutral stock return process that retains the unique statistical properties such as the fat-tailed distributions, the long-range dependence, and the asymmetry structure etc., and then transit to its risk-neutral distribution. Thus it is more flexible and accurate to capture the dynamics of the underlying stock return process and keep the rich set of real-world convertible bond specifications compared with previous model-driven models. The experiments on the Chinese convertible bond market demonstrate the effectiveness of DeepPricing model. Compared with the convertible bond market prices, our model has a better convertible bonds pricing performance than both model-driven models, i.e. Black-Scholes, the constant elasticity of variance, GARCH, and the state-of-the-art GAN-based models, i.e. FinGAN-MLP, FinGAN-LSTM. Moreover, our model has a better fitting capacity for higher-volatility convertible bonds and the overall convertible bond market implied volatility smirk, especially for equity-liked convertible bonds, convertible bonds trading in the bull market, and out-of-the-money convertible bonds. Furthermore, the Long-Short and Long-Only investment strategies based on our model earn a significant annualized return with 41.16% and 31.06%, respectively, for the equally-weighted portfolio during the sample period.

How Do Options Add Value? Evidence from the Convertible Bond Market

Abstract This paper studies the value relevance of the options market by focusing on convertible bond pricing. Pricing convertible bonds requires essentially the same set of information necessary to price options. Using a regression discontinuity design based on minimum stock price requirements for option listings, we find that the availability of stock options helps issuers attract more convertible bond buyers and reduces convertible issuers’ cost of financing. Our results highlight that the availability of individual stock options can add value to security issuers.

Financial Intermediaries and Agency Problems With and Without Vertical Incentives

I study agency problems between brokers and investors in the retail bond market. The presence of suitability or fiduciary regulations, which govern transactions in this setting, can lead to tensions for brokers between maximizing their own profit and acting in the best interests of their customers. This paper measures the degree to which these conflicting incentives influence brokers by examining the U.S. reverse convertible bond market. While brokers do consider the profits of investors when making decisions, I estimate that their own profits are roughly three times more important, suggesting the existence of severe agency problems that reduce consumer welfare.

How Do Options Add Value? Evidence from the Convertible Bond Market

This paper provides evidence that the availability of individual stock options adds value to security issuers. We focus on convertible bond issues because pricing convertible bonds requires essentially the same set of information necessary to price options. By exploiting the SEC’s minimum stock price requirement for option listing to employ a regression discontinuity design, we find that the availability of stock options significantly affects the pricing of convertible bonds. In line with options providing information, the effect is stronger when the overall information environment is poor. Listed options help issuers attract more convertible bond buyers and reduce the cost of financing. Overall, our results highlight the value relevance of the options market.

Research on the Pricing of Convertible bonds in China---Migration risk based on credit rating

At present, further research and exploration on credit risks are being carried out in the global field, and increasingly profound modern credit risks are exposed to the bond market. This requires that we cannot ignore the impact of credit rating migration risk on bond pricing, so as to adapt to the sustainable and healthy development of the bond market under the new normal of China's economy. The innovation point of this paper is to try to analyze the pricing of Convertible bonds in China from the perspective of credit rating migration risk. Tsiveriotis and Fernandes(1998) model is selected, and the credit risk in the model is assumed to be caused by the credit rating migration risk, and the credit spread is used to measure the credit rating migration risk. The research conclusion of this paper is as follows: First, it is valid to consider the risk of credit rating migration in the TF(1998) model. The market price of convertible bonds is on average 1.22% higher than the theoretical value of the model. In general, the theoretical value obtained from the model has little deviation from the market price, and has a good fitting degree. Second, from the Angle of credit rating, the selection of 32 samples of convertible bonds only empirical research shows that the credit rating of AA - convertible bonds average deviation rate is negative, suggest that the credit rating of AA - the phenomenon of convertible bonds value is underestimated, and AAA credit rating to AA, AA +, the average deviation rate of convertible bonds is positive, that credit rating AA (containing AA) more convertible bond value is overrated phenomenon, and the higher the credit rating of the average deviation rate of convertible bond, the greater the overvalued levels. It has certain guiding significance for participants in the convertible bond market.

Negative conversion premium

We document frequent occurrences of negative conversion premium (NCP) events in the Chinese convertible bond market, when the bond is convertible and the underlying stock can be freely sold. This implies that when an NCP event occurs, existing stock holders can earn a riskless profit through a long-short strategy which sells the underlying stock and buys the convertible bond at the same time, then converts the bond into stocks. Facing short sale constraints, traders not holding any position in the underlying stock can still profit from an overnight trading strategy which buys the convertible bond at the NCP event day t, then sells the converted stock on day t + 1. We also find that the next-day opening prices following NCP events are significantly lower, which is evidence for the stock selling from the overnight trading strategy. Overall, our findings show that investors in China are aware of the NCP events and they earn abnormal returns through active trading. However, it remains as a puzzle why existing stock holders such as institutional investors do not trade away the negative conversion premium through the riskless long-short strategy.

Valuation model for Chinese convertible bonds with soft call/put provision under the hybrid willow tree

The Chinese convertible bond market has been developing rapidly in the last 10 years. However, some special characteristics of the Chinese convertible bond, such as the soft call/put provision, cause huge difficulty in the valuation. In this paper, we establish a new valuation model for the Chinese convertible bond, based on the available Chinese market data, through a hybrid willow tree approach with consideration of the underlying stock price, stochastic interest rate, and credit risk of the issuer. We employ the Brownian bridge to handle the special characteristics. Finally, we examine our model prices for the daily market closing prices for 20 Chinese convertible bonds traded from 2007 to 2017. The empirical results show the effectiveness of our valuation model under the historical and implied volatilities of the underlying stock price.

The Analysis of Chinese Convertible Bond Market

Convertible bond is a type of hybrid security with both bond- and stock-like features. The Chinese market of convertible bonds has developed dramatically during the last decade. This paper will conduct a comprehensive analysis of this market. Firstly, a brief introduction of convertible bond and the historical evolution of this market in China is presented, then we analyze various investment risks related to convertible bonds. Next, this paper proposes the basic valuation model for convertible bonds, which is the Black-Scholes model and modifies it by taking the delusion effect of conversion into account, leading to the Gailai-Schneller model. In addition, the differences of the outcomes obtained by these two models are compared and analyzed based on the pricing of Shanghai Electric convertible bond. In the sixth part, this paper mainly explains two types of applications of convertible bonds in portfolio management. In the end, several problems existing in Chinese convertible market as well as some suggestions for solving them are discussed.