Valuation Model of Chinese Convertible Bonds Based on Monte Carlo Simulation

Yu Liu

Papers from arXiv.org

Abstract: We tackle the problem of pricing Chinese convertible bonds(CCBs) using Monte Carlo simulation and dynamic programming. At each exercise time, we use the state variables of the underlying stock to regress the continuation value, and apply standard backward induction to get the coefficients from the current time to time zero. This process ultimately determines the CCB price. We then apply this pricing method in simulations and evaluate an underpriced strategy: taking long positions in the 10 most undervalued CCBs and rebalancing daily. The results show that this strategy significantly outperforms the benchmark double-low strategy. In practice, CCB issuers often use a downward adjustment clause to prevent financial distress when a put provision is triggered. Therefore, we model the downward adjustment clause as a probabilistic event that triggers the put provision, thereby integrating it with the put provision in a straightforward manner.

Date: 2024-09, Revised 2025-01
New Economics Papers: this item is included in nep-ipr
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://arxiv.org/pdf/2409.06496 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2409.06496

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators (help@arxiv.org).