China Convertible Bond Investor Irrationality Conversion Behavioral Research

The convertible bond is the first financial derivative that have been introduced in China. In recent years ,China's convertible bonds market has developed rapidly.And convertible bonds became one of the most important financing methods as well as one of the most important investing products. A convertible bond is a security that needs the investor more rational reletive to the stock investor and the warrant investor. Due to the complexity of items designing of domestic convertible bonds and the lack of market environment supporting short sale system at present, what's more, all most the convertible bonds have entered into the conversion period, the practical market behavior of convertible bonds is by no means as ideal as the theoretical description. So, this paper devotes itself to the study of the various types of convertible bonds during the conversion period and analyses their conversion behavior.In the paper , we study about investor's voluntary convert behavior in theory and in practice, with the 30 convertible bonds which have entered into the conversion period from July 12, 2000 to April 7, 2008 and listed on Shanghai Stock Exchange. We find that almost 58.5% of voluntary convert behaviors are inconsistent with the principle of rational exercises; and we evaluate the cause of the irrational exercises. Using a nonparametric technique namely, the generalized additive model (GAM),The results are as follows: First of all, liquidity in convertible bonds market has no influence on irrational exercises. Secondly, irrational exercises are statistical significantly triggered by the overnight risk and by conversion loss. Thirdly , cognitive bias of investors led by the "continuation of the trend" faith and reference will affect irrational behavior of investors. At the same time, irrational investors have a feature of Framing. When the returns of the underlying stock is positive, high volatility will increase irrational convert behavior, and when the returns of the underlying stock is negative, high earnings volatility will reduce irrational convert behavior.