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Valuation model for Chinese convertible bonds with soft call/put provision under the hybrid willow tree

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  • Changfu Ma
  • Wei Xu
  • George Yuan

Abstract

The Chinese convertible bond market has been developing rapidly in the last 10 years. However, some special characteristics of the Chinese convertible bond, such as the soft call/put provision, cause huge difficulty in the valuation. In this paper, we establish a new valuation model for the Chinese convertible bond, based on the available Chinese market data, through a hybrid willow tree approach with consideration of the underlying stock price, stochastic interest rate, and credit risk of the issuer. We employ the Brownian bridge to handle the special characteristics. Finally, we examine our model prices for the daily market closing prices for 20 Chinese convertible bonds traded from 2007 to 2017. The empirical results show the effectiveness of our valuation model under the historical and implied volatilities of the underlying stock price.

Suggested Citation

  • Changfu Ma & Wei Xu & George Yuan, 2020. "Valuation model for Chinese convertible bonds with soft call/put provision under the hybrid willow tree," Quantitative Finance, Taylor & Francis Journals, vol. 20(12), pages 2037-2053, December.
    • Handle: RePEc:taf:quantf:v:20:y:2020:i:12:p:2037-2053
    DOI: 10.1080/14697688.2020.1814022
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    Cited by:

    1. Marie-Claude Vachon & Anne Mackay, 2024. "A Unifying Approach for the Pricing of Debt Securities," Papers 2403.06303, arXiv.org, revised Oct 2024.
    2. Kim, Byung-June & Jang, Bong-Gyu, 2021. "Convertible bond valuation with regime switching," Chaos, Solitons & Fractals, Elsevier, vol. 150(C).
    3. Xiaoyu Tan & Zili Zhang & Xuejun Zhao & Shuyi Wang, 2022. "DeepPricing: pricing convertible bonds based on financial time-series generative adversarial networks," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-38, December.
    4. Yu Liu & Gongqiu Zhang, 2024. "Valuation Model of Chinese Convertible Bonds Based on Monte Carlo Simulation," Papers 2409.06496, arXiv.org, revised Sep 2024.

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