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Theoretical Pricing Model Of Convertible Bonds Under Option Game, Statistical Arbitrage And Empirical Analysis

Posted on:2014-01-15Degree:DoctorType:Dissertation
Country:ChinaCandidate:J Y BaoFull Text:PDF
GTID:1229330398986739Subject:Management Science and Engineering
Abstract/Summary:PDF Full Text Request
Diversification of financial products plays an essential role in financial market in China. The promotion in the development of financial market products not only boosts the financial market, but also enhances the capacity of withstanding risk. With the peculiar characteristics, convertible bond wins the favor from financial market participants. The expansion of the scale in convertible bond market will surely carry weight to the financial market. Due to the complex characteristics and the relevant terms, the convertible bond pricing, the behaviors among participants and the market features are difficult to understand. Therefore, it is important to devote to the corresponding research of convertible bond.Firstly, convertible bond’s call policy embeds the Parisian option feature, which has some effect on the value of convertible bond. Based on non-arbitrage principle, necessary partial equations are put forward to capture the characteristic in Parisian option, and simultaneously tackle the interaction between firm and bondholders. In addition, numerical illustrations are displayed not only to clarify some properties, but also present some explanations to the value of convertible bond related to Parisian option and call notice period. The results indicate the fact the Parisian option decreases the value of the convertible bond, at the same time, the longer is the call notice period, the higher is the value. That’s to say, these findings are in a line with the purpose of the convertible bond.Secondly, in order to analyze the announcement effect of convertible bond, a new permutation test of a small sample for second-stochastic dominance is proposed. By using original permutation test procedure and combining the stochastic dominance theory, a standard statistical test to distinguish between good and bad from the small sample data is constructed. Furthermore, the new test is applied to evaluation of announcement effect as the issuance of convertible bond. The results of analysis focus on the changes of relevant stock prices, and demonstrate that most stock prices have a negative effect after the issuance. Such outcomes can partially reflect the response of investors to the financing decision.Finally, the analysis of pairs trading strategy was introduced to the convertible bond market in order to seek the arbitrage opportunities. Specifically, the unit root test and cointegration test are applied to select the objective samples during observed period, and then statistical arbitrage strategy is constructed accordingly. The feasibility of the strategy was supported by results from verifiable period.In general, the results proposed in this dissertation will provide some insight into the characteristics of convertible bonds and promote the development of convertible bond market in China.
Keywords/Search Tags:Convertible bond, Option game, Announcement effect, Stochastic dominance, Pairs trading
PDF Full Text Request
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