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Research on Pricing Model of Convertible Bond in Anti-Perfect Market

Author: LiuZuoXin
Tutor: TangWanSheng
School: Tianjin University
Course: Systems Engineering
Keywords: Convertible Bond Pricing Mode Interest Rate Term Structure Probability Criterion Hedge Non-Rational
CLC: F830.91
Type: Master's thesis
Year: 2007
Downloads: 99
Quote: 0
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Abstract


As a primary financial tool, convertible bond has the characteristic like common bond and American option and its risk and income are also between fixed income bond and stock. Convertible bond has many price-affected factors and complicated designing items. All bring troubles to compute but give the direction to the research on financial derivatives. It provides the method to solve pricing and risk management about intricate structural derivatives. Research on interest rate, stock, risk and hedge can be driven direct or indirect. So research on convertible bond has important technical and practical value.After having a detailed introduction about convertible bond pricing model, this article analyses corporation bond’s interest rate structure and divides the factors into risk-free interest rate and the spread of the corporation bond. Considering to term structure of risk-free interest rate and the spread in the Markov process, model computes the two random processes respective, also it need use the bankruptcy probability in the model. It may affect the bond price and the model can get the price of convertible in discrete process. This paper uses the probability criterion to guide the investor hedge and can hedge the option risk in the convertible bond and only get the fixed interest. Integrating the hypothesis in behavior finance that the market exist non-rational investors, paper builds a convertible bond pricing model in the non- ideal market. This model considers the affection to the market because of the behavior of non-rational investors and it affects the rational investors’investing behavior and they adjust their best decisions dynamic follow the market. The model is a three- factor model contains stock price, interest rate term and non-rational investors’behavior. At last we look back the item-design of convertible bond and some innovative mode.

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CLC: > Economic > Fiscal, monetary > Finance, banking > Finance, banking theory > Financial market > Securities market
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