A Study on the Pricing of Convertible Bonds in the Chinese Market Based on the LSMC Model

Jiajie Qiu; Xiangxin Tao; Yanting Ji

doi:10.62051/ijgem.v5n1.08

Authors

Jiajie Qiu
Xiangxin Tao
Yanting Ji

DOI:

https://doi.org/10.62051/ijgem.v5n1.08

Keywords:

Pricing of Convertible Bonds, Black-Scholes Model, LSMC Model, Binomial Tree Model, Heston Model

Abstract

Convertible bonds, which possess both stock and option characteristics, currently lack a sufficiently effective pricing method for the complex and specific clauses found in Chinese convertible bonds. This study employs structured model pricing and numerical experiment methods for the pricing of Chinese convertible bonds. The structured model selected is the Black-Scholes model, while the numerical experiment methods include the binomial tree pricing model and the Least Squares Monte Carlo (LSMC) model. A proposal is made to introduce an implied volatility model in the LSMC model pricing method, incorporating the Heston model to consider the impact of the implied volatility of the underlying stock in the real market, and further adjusting the LSMC model by estimating the volatility of the underlying stock using the implied volatility model. Empirical results indicate that numerical methods have higher pricing accuracy than structured models, with the LSMC model demonstrating the highest accuracy. It is also found that there is a certain premium phenomenon in the Chinese market for convertible bonds. Furthermore, the accuracy of the model improves after the volatility adjustment, indicating that implied volatility has explanatory power for the specific clauses contained in convertible bonds, and this influence is reflected in pricing.

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