Convertible Bonds And The Linkage Relationship Between Research And Stock Markets

With the development of financial liberalization and the improvement in trade technology, the information that transferred between different financial markets has been accelerated. There is an obvious Co-movement between financial markets.Convertible bond is an important investment instrument and financial asset. For the advantage of low-cost financing and risk elusion function, it is favored by the financiers and investors. Since the beginning of reform and opening-up, China's stock market as "barometer" of macroeconomic has developed rapidly and has become the major place for financing of macro-economic system.On one hand, studying on the Co-movement of convertible bonds market and stock market could enrich Co-movement theory, expand the application of theory; On the other hand, studying on the Co-movement of convertible bonds market and stock market would provide a guideline for the individual or institutional investors and has great practical significance for macro-control and the improvement of financial markets supervising.Firstly, this paper reviewed the researches about Co-movement of financial markets; Then, introduced the mechanism theory of Co-movement between China's convertible bonds market and stock market:In next section, the Hushen 300 Index and the S&P/CITIC Convertible Bond Index were selected. Then, by using co-integration test, causality test, impulse response functions and variance decomposition test in VAR,to analysis the Co-movement of returns between China's convertible bond market and stock market; In the last.this paper used VAR-EGARCH model to analysis the volatility spillover between China's convertible bond market and stock market and used dynamic conditional correlation multivariate GARCH model to analysis the dynamic correlation between China's convertible bond market and stock market.The empirical research results showed that there was not a long-term equilibrium relationship between Chinese convertible bonds market and the stock market, the stock market was the Granger cause of convertible bonds market. The stock market was a good predictor for convertible bonds market, it indicated that the investors could reap the benefits according the historical information; As for the volatility spillover, there was an obvious bidirectional spillover between this two markets, which means that the information transmission mechanisms have been established between this two markets which can provide a very important reference to predict the risk in the stock market and convertible bonds market. The analysis of the correlation coefficient of dynamic perspective indicated that these two markets is always positive correlation with each other. So portfolio with these two assets would be not conducive to disperse risks and improving returns. This paper put forward two policy recommendations based on the empirical research results. On the one hand, the government should develop the convertible bond market vigorously, promote the coordinated development of the two markets and improve the transmission mechanisms of information between the two markets; On the other hand, investors should consider the co-movement between the two markets during constructing portfolio to avoid investment errors, and sequentially, to improve the profit of investment portfolio.