Announcement Effect And Arbitrage Strategy Of Resettable Convertible Bonds

Due to the complexity of the embedded terms of convertible bonds(CBs),the pricing of convertible bonds has been one of the research difficulties.Compared with numerical pricing,analysis pricing has some advantages like: high pricing efficiency;intuitive pricing analysis.Also it is advantageous to deal with optimization issues,analyze its economic implications,and build investment strategies.The theoretical basis of this paper is to use the resettable convertible bond pricing model(RCBs)obtained by the complete dismantling method.This paper mainly analyzes the market efficiency and application of this pricing model.First of all,from the influencing factors of the pricing error rate of the model,it is concluded that the pricing error rate of convertible bonds is a mean reverting process.What's more,the pricing error rate is subject to the difference between stock price and conversion price,stock volatility,coupon,maturity,and credit spread and also has some connection with the rolling price earnings ratio and rolling price cash flow ratio.Last but not least,based on the regression of pricing error rate with rolling PE,rolling PCF,and dummy variable which represents whether the pricing error rate of previous day is smaller than zero or not,this paper obtains the regression equation to estimate the future pricing error rate as a standard for choosing the convertible bond to invest in.Compared with the average yield of all the RCBs during the same period,it is concluded that this investment strategy is effective.Secondly,from the effect of the downward adjustment of the price of the conversion price,the empirical evidence shows that the downward revision clause of the convertible bond price has a positive announcement effect on the yield of the convertible bond itself,which will be reached at the maximum five days after the announcement date.After constructing the trading strategy of convertible bonds around the announcement date,a daily yield of about 0.15% was obtained.Finally,this paper uses the pricing error rate of convertible bonds as a threshold to construct arbitrage strategies for convertible bonds and Treasury bond futures.To hedge against interest rate risk,this arbitrage strategy finally obtains a result with a maximum yearly rate of return of 7.8%.