Beyond rocket science: A factor model for convertible bond returns

Zhiyong Li, Haixu Wang and Mei Yu

Economics Letters, 2023, vol. 233, issue C

Abstract: Due to the lack of high-quality data and pricing complexity, convertible bonds are difficult to be captured by the factor model widely used in empirical asset pricing. We consider a zoo of convertible bond predictors in the Chinese markets and use instrumented principal components analysis (IPCA) to capture the cross-sectional returns of convertible bonds. Compared with the observable factor models in corporate bond and equity markets, the latent factor model can better describe the common variation in realized returns, and exhibit smaller pricing errors both in-sample and out-of-sample.

Keywords: Factor model; Convertible bonds; Return predictability; Option pricing (search for similar items in EconPapers)
JEL-codes: G12 G14 G15 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:233:y:2023:i:c:s0165176523003877

DOI: 10.1016/j.econlet.2023.111362

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