Convertible Bond Arbitrage Strategy:Case of Chinese Market

Abstract

Abstract:

The core idea behind classic convertible bond arbitrage strategy is to take a long position in bonds and a short position in the underlying stocks in an effort to exploit the underpricing of convertible bonds. In this paper, we use the refined theoretical convertible bond pricing model developed by Tsiveriotis and Fernandes^[1] to look into Chinese convertible bond market from 2010 through 2014, and conclude that on average, the issued convertible bond suffered about -6.09% pricing error. Then, we construct two types of convertible bond arbitrage strategies using the daily history data of 41 tradable convertible bonds and underlying stock in Hu-Shen convertible bond market between 2010 and 2014, which generate 0.299% and 0.263% average monthly return respectively. Finally, we find that convertible arbitrage strategy is not significantly correlated to Hu-Shen 300 index, convertible bond mutual fund and convertible bond market index, and this implies that convertible bond arbitrage strategy is an excellent alternative investment method.

Key words: convertible bond, arbitrage strategy, asset pricing

Huang Binghua, Feng Yun. Convertible Bond Arbitrage Strategy:Case of Chinese Market[J]. , 2017, 29(11): 3-16.

References

[1] Tsiveriotis K., Fernandes C. Valuing Convertible Bonds with Credit Risk[J]. Journal of Fixed Income, 1998,8(3):95-102
[2] Calamos N. P. Convertible Arbitrage:Insights and Techniques for Successful Hedging[M]. Hoboken,New Jersey:John Wiley & Sons, 2003
[3] Mitchell M., Pedersen L., Pulvino T. Slow Moving Capital[J]. American Economic Review, 2007,97(2):215-220
[4] Brown S. J., Grundy B. D., Lewis C. M., et al. Convertible and Hedge Funds as Distributors of Equity Exposure[J]. The Review of Financial Studies, 2012,25(10):3077-3112
[5] Brown S. J, Grundy B. D., Lewis C. M., et al. Hedge Fund Involvement in Convertible Securities[J]. Journal of Applied Corporate Finance, 2013,25(4):60-73
[6] Ackermann C., Mcenally R., Ravenscraft D. The Performance of Hedge Funds:Risk, Return, and Incentives[J]. The Journal of Finance, 1999,54(3):833-874
[7] Horst J. T., Salganik G. Styling Chasing by Hedge Fund Investors[J]. Journal of Banking & Finance, 2014,39(1):29-42
[8] Agarwal V., Fung W. H., Loon Y. C., et al. Risk and Return in Convertible Arbitrage:Evidence from The Convertible Bond Market[J]. Journal of Empirical Finance, 2011,18(2):175-194
[9] 陈道伦,陈欣,陈工孟,等.阳光私募基金经理具有卓越的投资能力吗?[J]. 财经研究, 2013,39(12):85-99
[10] Hutchinson M. C., Gallagher L. A. Convertible Bond Arbitrage:Risk and Return[J]. Journal of Business Finance & Accounting, 2010,37(1):206-241
[11] Batta G., Chacko G., Dharan B. G. A Liquidity-based Explanation of Convertible Arbitrage Alphas[J]. Journal of Fixed Income, 2010,20(1):28-43
[12] Gallagher L. A., Hutchinson M. C., O'Brien J. Does Convertible Arbitrage Risk Exposure Vary through Time?[DB/OL]. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2595662, 2015
[13] Jong A. D., Dutordoir M., Genuchten N. V., et al. Convertible Arbitrage Price Pressure and Short-sale Constraints[J]. Financial Analysts Journal, 2012,68(5):70-88
[14] Loncarski L., Horst J. T., Veld C. The Rise and Demise of The Convertible Arbitrage Strategy[J]. Financial Analysts Journal, 2009,65(5):35-50
[15] 郑振龙,林海.中国可转换债券定价研究[J]. 厦门大学学报(哲学社会科学版), 2004,(2):93-99
[16] 赖其男,姚长辉,王志诚.关于我国可转换债券定价的实证研究[J]. 金融研究, 2005,(9):105-121
[17] Ingersoll J. E. A Contingent Claim Valuation of Convertible Securities[J]. Journal of Finance Economics, 1977,4(3):289-321
[18] Brennan M. J., Schwartz E. S. Convertible Bonds:Valuation and Optimal Strategies for Call and Conversion[J]. Journal of Finance, 1977,32(5):1699-1715
[19] McConnell J. J., Schwartz E. S. LYON Taming[J]. Journal of Finance, 1986,41(3):561-576
[20] Ayache E., Forsyth P. A., Vetzal K. R. Valuation of Convertible Bonds with Credit Risk[J]. Journal of Derivatives, 2003,11(1):9-29
[21] Ammann M., Kind A., Wilde C. Simulation-based Pricing of Convertible Bonds[J]. Journal of Empirical Finance, 2008,15(2):310-331
[22] Kimura T., Shinohara T. Monte Carlo Analysis of Convertible Bonds with Reset Clauses[J]. European Journal of Operational Research, 2006,168(2):301-310
[23] Beveridge C., Joshi M. Monte Carlo Bounds for Game Options Including Convertible Bonds[J]. Management Science, 2011,57(5):960-974
[24] Chan A. W. H., Chen N. F. Convertible Bond Underpricing:Renegotiable Covenants, Seasoning, and Convergence[J]. Management Science, 2007,53(11):1793-1814
[25] Zabolotnyuk Y., Jones R., Veld C. An Empirical Comparison of Convertible Bond Valuation Models[J]. Financial Management, 2010,39(2):675-706
[26] Batten J. A., Khaw K. L. H., Young M. R. Convertible Bond Pricing Models[J]. Journal of Economic Surveys, 2014,28(5):775-803
[27] Ballotta L., Kyriakou I. Convertible Bond Valuation in A Jump Diffusion Setting with Stochastic Interest Rates[J]. Quantitative Finance, 2015,15(1):115-129
[28] Finnerty J. D. Valuing Convertible Bonds and The Option to Exchange Bonds for Stock[J]. Journal of Corporate Finance, 2015,(31):91-115
[29] 周其源,吴冲锋,燕志雄. 有锁定期的零息可赎回可转换债券定价解析式[J]. 管理评论, 2009,21(1):27-33
[30] 李念夷,陈懿冰. 基于违约风险的三叉树模型在可转债定价中的应用研究[J]. 管理评论, 2011,23(12):26-31
[31] 张卫国,史庆盛,肖炜麟. 考虑支付红利的可转债模糊定价模型及其算法[J]. 管理科学学报, 2010,13(11):86-93
[32] Ammann M., Kind A., Wilde C. Are Convertible Bond Underpriced? An Analysis of The French Market[J]. Journal of Banking and Finance, 2003,27(4):635-653
[33] 刘娥平,韦科帆. 可转换债券价值低估的影响因素研究[J]. 金融研究, 2006,(9):118-128
[34] 唐国正. 投资群体差异与我国可转债价值低估——基于云化转债的案例分析[J]. 管理世界, 2005,(8):121-133
[35] 周铭山,董志勇,方旭赟,等. 我国可转债定价效率可以提高吗?——基于套利交易成本的视角[J]. 经济学(季刊), 2013,12(4):1277-1298
[36] 牟晖,韩立岩,谢朵,等. 中国资本市场融资顺序新证:可转债发行公告效应[J]. 管理世界, 2006,(4):19-28
[37] 袁显平,柯大刚. 可转换债券融资相关事件的股价效应研究[J]. 管理评论, 2008,20(4):17-24
[38] Li H., Liu H., Siganos A. A Comparison of The Stock Market Reactions of Convertible Bond Offerings Between Financial and Non-financial Institutions:Do They Differ?[J]. International Review of Financial Analysis, 2016,(45):356-366
[39] 吴海燕,兰秋军,马超群.中美可转换债券比较研究[J]. 财经理论与实践, 2013,34(2):49-52
[40] Burlacu R. New Evidence on The Pecking Order Hypothesis:The Case of French Convertible Bonds[J]. Journal of Multinational Financial Management, 2000,10(3):439-459
[41] 屈文洲,林振兴.中国上市公司可转债发行动机:"后门权益"VS"代理成本"[J]. 中国工业经济, 2009,(8):141-151
[42] King R. Convertible Bond Valuation:An Empirical Test[J]. Journal of Financial Research, 1986,9(1):53-69
[43] Carayannopoulos P. Valuing Convertible Bonds under The Assumption of Stochastic Interest Rates:An Empirical Investigation[J]. Quarterly Journal of Business and Economics, 1996,35(3):17-31
[44] Kang J. K., Lee Y. W. The Pricing of Convertible Debt Offerings[J]. Journal of Financial Economics, 1996,41(2):231-248
[45] Chio D., Getmansky M., Tookes H. Convertible Bond Arbitrage, Liquidity Externalities, and Stock Prices[J]. Journal of Financial Economics, 2009,91(2):227-251