A Pricing Model for Convertible Bonds in China

Since the 2008 Financial Crisis, trade of convertible bonds in China has tended to be dull with its market size shrinking, which is in sharp contrast with the previous market boom. One reason for this contrast is that the price of convertible bonds is mainly dominated by market sentiment, rather than the underlying company stock prices, and that there is no proper pricing tool in practice. Based on the existing pricing models and specific provisions of convertible bonds, this paper puts forward a bond-option model, and further illustrates this pricing model in theoretical and numerical ways respectively. An empirical study on 8 active convertible bonds in Shanghai and Shenzhen stock market during the first half year of 2011 shows that theoretical prices are 1%--5% lower than the actual ones. We own this bias to investors' irrationality and market manipulation.