Convertible Bonds Pricing Based On The Extension Of LSM Model

In recent years, China has been devote their efforts to promoting the reform of thefinancial, formally launched Alibaba’s yu e bao fund, private banks in2013. At present,convertible bonds market of our country are relatively small and the convertible bonds arealways in short supply. However, convertible bonds have bonds, stocks and convertible withthe complicated conditions of interaction,to estimate the price of convertible bond iscomplicated. Therefore, research on convertible bonds pricing has been the emphasis anddifficulty in academic circles.Firstly, this paper introduces the definition of the convertible bonds, the basic elementsof convertible bonds and influence factors of convertible bonds. Secondly, focus on theproblems about the estimation of convertible bonds price that discussed in this paper. Basedon this, this paper considers the convertible bond redemptions, back to the terms of sale, pathdependence and the American option characteristics, choice the extension of the Leastsquares Monte Carlo Simulation (further Square Monte Carlo Simulation LSM) method tosimulate the price of convertible bonds.To check out the accuracy of LSM model,We choose18convertible bonds as examples to validate the pricing efficiency of the model. comparedifferent estimation efficiency of the models. In order to make the results more accurate,usethe GARCH (1,1) model to estimate the volatility of zhonghai bond, bo hui bond.At last,the empirical results show that the pricing model of convertible bonds currentlyused there are exist varying degrees of overvalued, and extend the LSM model has relativelyhigher accuracy, pricing model error less than5%of permissible error range.It is important for the issuers and investors to estimate the price of convertible bondsreasonablely.while the extended LSM model can be relatively high simulation of theconvertible bonds pricing, but with the market price of convertible bonds or there is a certaingap, also need to constantly improve. Factors affecting the price of convertible bonds arevaried, such as transaction cost, stock dividends, dilution, and so on.this article does notconsider these factors, how these factors may affect the extension of the LSM method for theaccuracy of the convertible bonds pricing. Considering various factors that influence the price of convertible bonds pricing precision of the extended LSM model is the direction of myfurther research.