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The investor group differences with the empirical analysis of convertible bonds discount - Chinese market

Author: LiuLi From: www.yourpaper.net Posted: 2009-04-01 12:50:39 Read:
Abstract: convertible bond discount finance a mystery. In this paper, the application of the data of the Chinese market on the interpretation of the convertible bond investors discount group differences hypothesis and liquidity hypothesis to an empirical test. The study found the Chinese market, the average discount of convertible bonds to 10.2%, the level of discount of the convertible bonds and the maturity date, the stock turnover, stock book market than significant relationship convertible bond market yields and stock yields weaker than theoretically expected relationship between these phenomena to support investor group differences hypothesis; This paper found no further evidence to support the hypothesis of liquidity.
Keywords: convertible bonds, the investor group differences, liquidity
I. Introduction
Convertible bonds (hereinafter referred to as convertible bonds) of both stock and bond characteristics, is a class of financial instruments widely used in the financial markets in developed countries. The discount of the convertible bonds is lower than the theoretical value deduced using the option pricing method refers to the actual market price of convertible bonds. The discount of the convertible bonds is a well-known phenomenon of practitioners in the financial markets of developed countries, and is applied to construct the hedge fund arbitrage strategy. Discount of convertible bonds in terms of academic research, has also been confirmed by empirical research. Convertible bond prices, Carayannopoulos (1996) application based on the value of the company and stochastic interest rate model pricing model study of the U.S. market and found that the average price of the convertible bond market than the theoretical value of the low of 12.9%; Buchan (1998) structure can be converted the Convertible Bond prices discount convertible bond arbitrage strategy research, the study found that the 1989-1996 convertible arbitrage strategy month average excess gain of 0.3%; Ammann, the Kind and Wilde (2003) studied the French market The trading price of the bonds of the 21 samples found that average 3% lower than the theoretical price.
For a long time, the convertible bond discount finance a mystery. The convertible bond pricing model as well as the complexity of the terms of the convertible bonds, the convertible bonds the discount reason the literature and rare. Chan and Chen (2005) studied the convertible bonds on the U.S. market discount with the relationship between the convertible bond characteristics, the study found that the level of discount convertible bond credit rating
Negative correlation studies suggest that convertible bonds renegotiate the terms of the discount, and investors in order to avoid the risk of re-negotiations, which discount trading convertible bonds.
In April 2001, the China Securities Regulatory Commission issued the Implementation Measures for the listed companies to issue convertible bonds and supporting documents, which greatly promoted the development of the convertible bond market in China. As of December 2004, the Shanghai Stock Exchange and Shenzhen Stock Exchange listed convertible bonds a total of 30, the total market value of 34.5 billion yuan. Pricing convertible bonds issue has been the focus of domestic scholars, many studies have found that also exists in the Chinese market, the discount phenomenon convertible bonds (Yang Yun, 2003; Wei Zhenjiang, Qian Shi-chun, 2004; WORLD ECONOMY, woodlands, 2004; TangGuo n, 2005). Yang Yun (2003), the convertible bonds undervalued phenomenon called the "confusion" of the option pricing theory, and that the reason for the phenomenon is the lack of short selling mechanism, Wei Zhenjiang, Qian Shi-chun (2004) takes a similar view . This interpretation is the lack of support from both theoretical and empirical aspects. Theoretical aspects, even if a large number of documented allow short selling, due to the limitations of arbitrage (Limit to Arbitrage) and other reasons, the the phenomenon still seriously underestimated the value of securities may exist for a long time (De Long et al, 1990; Shleifer and Summers, 1990; Shleifer and Vishny , 1997); empirical side, the market for short selling mechanism exists, there are still a discount of convertible bonds (Chan and Chen, 2005).
Convertible bonds theoretical value is the value of the efficient market conditions, the market price of the underlying stock. If we acknowledge the applicability of the pricing model, the convertible bonds the discount phenomenon can be seen as implied by the actual price of the stock price below the stock's market price of convertible bonds. So why convertible bonds implied price will be lower than the stock market price? The main difference of the bonds and their underlying stock risk - return characteristics, so they are suitable for different types of investors. This study found that Chinese securities market on convertible bonds outstanding shares of stock of investment groups have significant differences, The former mainly institutional investors, the latter mainly to individual investors. Relative to the convertible bonds, stocks exist serious noise trader risk, noise trader risk pricing and stock investment groups (individual investors) lower than its bond investment groups (institutional investors) pricing. Convertible bond investors are demanding lower prices (which corresponds to a lower implied share price) to cover its commitments noise trader risk (call investor group differences hypothesis).
On the other hand, the financial theory that the size of the transaction costs will have an impact on the prices of financial assets. The so-called liquidity premium is so illiquid asset prices are relatively low if the future cash flow of the two assets. The theoretical value of the convertible bond option pricing theory, efficient market conditions, but the option pricing theory does not take into account the liquidity problem, the actual value of the convertible bonds will reflect the stock's liquidity. If the liquidity of convertible bonds is lower than the stock's liquidity, investors will not compensate for the liquidity requirements, and that actual price is lower than the theoretical value of convertible bonds (referred to herein as the liquidity hypothesis).
TANG Guo (2005), the the "cloud bonds in the form of case studies to explore the interpretation of the liquidity and investor group differences hypothesis cloud of bonds discount. This paper the application of large sample data for the Chinese market of convertible bond discount phenomenon and can be transferred
Discount on bonds investor group differences hypothesis and liquidity hypothesis an empirical test. We find that the average discount rate of 10.2% convertible bonds of the Chinese market, the time of the level of discount and the maturity of convertible bonds, stock turnover, stock book market than significant relationship, bond market yields and stock returns weaker than the relationship between the rate the theoretical expected, these phenomena support the investor group differences hypothesis; This paper found no further evidence to support the liquidity hypothesis.
The main contribution of this paper include, first, this paper is the first study Chinese convertible bond discount phenomenon and the reasons for the large sample empirical research. Second, we found that the characteristics of the Chinese market discount convertible bonds, these features provide support to explain the reason of convertible bonds discount. Third, the empirical research for the investor group differences hypothesis provides evidence found investor group differences due to the risk of noise traders on the stock pricing differences convertible bond discount, this rich field of behavioral asset pricing empirical literature.
Of this paper is organized as follows: Section II describes this convertible bond pricing model and calculation method; Section III provides a description of the data sample; Section IV, the results of empirical research, including convertible bonds discount study of the characteristics and the investor group differences hypothesis and liquidity hypothesis testing; last one is the conclusion of this article.
Second, the pricing model
Convertible bond is a relatively complex financial instruments, on the one hand, the other hand, due to the characteristics of the stock can be converted to make it the nature of both bonds and stock options, convertible bonds usually attached redeemable (Call Provision) puttable (Put Provision), the conversion price downward revision terms, these features make the pricing of convertible bonds both from the theoretical and practical computational complexity. Ingersoll (1977) and Brennan and Schwartz (1977) is a pioneering study of the convertible bond pricing, they take advantage of the ideological model of Merton (1974). Model assumes that the convertible bond is a corporate value of the underlying assets of derivative products, the value of the company follows a geometric Brownian motion, using the Black-Scholes-Merton option pricing theory to derive convertible bond prices to meet the partial differential equations, based on convertible bonds the terms of the conversion terms, redemption terms, to determine the optimal conversion of convertible bonds, the redemption strategy, and thus determine the condition of partial differential equations of the boundary conditions and the final value, and finally the use of the numerical algorithm to calculate the value of the convertible bonds. On this basis, Brennan and Schwartz (1980) convertible bond pricing extended to consider the case of random interest rates, but the study pointed out that the impact of of random changes calculated from an empirical point of view, the interest rate for the convertible bond value.
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