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Topic

Are Convertible Bonds Efficiently Priced in the Chinese Market? Insights from a Simulation-Based Pricing Model

Department of Mathematics and Statistics

Date & location

• Thursday, June 5, 2025
• 7:00 P.M.
• Virtual Defence

Examining Committee

Supervisory Committee

• Dr. Xuekui Zhang, Department of Mathematics and Statistics, ßÉßɱ¬ÁÏ (Supervisor)
• Dr. Ke Xu, Department of Economics, UVic (Outside Member)

External Examiner

• Dr. Min Tsao, Department of Mathematics and Statistics, UVic

Chair of Oral Examination

• Prof. Merrie Klazek, School of Music, UVic

Abstract

This study investigates the pricing efficiency of Chinese convertible bonds and presents evidence of systematic mispricing. To support this analysis, we develop a pricing framework based on the Least Squares Monte Carlo (LSM) method, tailored to reflect contractual features unique to the Chinese market. Using this model, we simulate fair values over the full lifespan of 154 convertible bonds issued between 2015 and 2019 and compare them to observed market prices. The model-predicted price curves generally align well with observed price patterns, demonstrating the robustness and practical value of our approach. However, we also find that trading prices occasionally deviate from model-implied values by more than 10%, with these deviations exhibiting consistent patterns rather than random fluctuations. Furthermore, we demonstrate that simple trading strategies—both at the individual bond level and at the portfolio level—can exploit these discrepancies to generate substantial excess returns. These findings suggest that the Chinese convertible bond market is only partially efficient and highlight persistent arbitrage opportunities, underscoring the importance of market-specific valuation models in emerging financial markets.