Convertible Bond Pricing in Chinese Transportation Industry : A Comparison Methods Between Binomial Tree model and Black-Scholes Model DOI: https://doi.org/10.33093/ijomfa.2024.5.2.13
Article Sidebar
Main Article Content
Abstract
One bond type that can lower financing costs for the issuer is a convertible bond. Additionally, its characteristic with option value gives investors access to high-yielding, low-drawdown, and superior investment instruments. Exactly, convertible bonds have a strong market appeal to investors. In recent years, the issuance scale of convertible bonds has continued to expand, and its share in the bond market has gradually increased. Fair pricing is essential to maintaining the convertible bond market’s smooth operation. In light of this, the convertible bonds in the transportation sector listed on the Shanghai Stock Exchange are chosen for this article. Following the acquisition of the fundamental data pertaining to convertible bonds, the bonds are fitted into the bond list using the Black-Scholes and Binomial Tree models. The theoretical value is then priced empirically after other pertinent factors have been duly taken into account. Comparing the estimation with their actual values to obtain the efficiency results, which indicates that Black-Scholes model yields a more accurate estimation than any Binomial Tree model with preset step sizes. The holistic undervaluation means the favorable sentiments of investors towards it. In summary, the contribution of pricing projects to the operation of underlying industries and the economy boost inspired.
Article Details
References
Altintig, Z.A. and Butler, A.W. (2005). Are they Still Called Late? The Effect of Notice Period on Calls of Convertible Bonds. Journal of Corporate Finance, 11, 337–350.
Ahn, J., & Song, M. (2007). Convergence of the trinomial tree method for pricing European/American options. Applied mathematics and computation, 189(1), 575-582.
Bonus, H. (1973). Quasi-Engel curves, diffusion, and the ownership of major consumer durables. Journal of Political Economy, 81(3), 655-677. https://www.journals.uchicago.edu/doi/abs/10.1086/260063
Brennan, M. J., & Schwartz, E. S. (1977). Convertible bonds: Valuation and optimal strategies for call and conversion. The Journal of Finance, 32(5), 1699-1715.
Brennan, M. J., & Schwartz, E. S. (1980). Conditional predictions of bond prices and returns. The Journal of Finance, 35(2), 405-417.
Batten, J. A., Khaw, K. L. H., & Young, M. R. (2018). Pricing convertible bonds. Journal of Banking & Finance, 92, 216-236.
Black, F. & Scholes, M. (1973). The pricing of options and corporate liabilities. The Journal of Political Economy, 81(3), 637-654. http://www.jstor.org/stable/1831029?origin=JSTOR-pdf
Carr, P., & Wu, L. (2003). The finite moment log stable process and option pricing. The Journal of Finance, 58(2), 753-777.
Cox, J. C., Ross, S. A., & Rubinstein, M. (1979). Option pricing: A simplified approach. Journal of financial Economics, 7(3), 229-263.
Dai, T. S., Fan, C. C., Liu, L. C., Wang, C. J., & Wang, J. Y. (2022). A stochastic-volatility equity-price tree for pricing convertible bonds with endogenous firm values and default risks determined by the first-passage default model. Journal of Futures Markets, 42(12), 2103-2134.
Derman, W. (1996). Hypertension and exercise-prescribing treatment to active patients-a guide for the general practitioner. Modern Medicine, 21(6), 35-42.
Dong W. (2015). An Empirical Study on the Pricing of Convertible Bonds. Statistics and decision, 14, 168-170. https://doi.org/10.13546/j.cnki.tjyjc.2015.14.047
Du, X., & Chen, L. (2018, July). Pricing Convertible Bonds Based on Black-Shcoles Formula. 4th International Conference on Economics, Social Science, Arts, Education and Management Engineering (ESSAEME 2018). Atlantis Press.
Fatone, L., Mariani, F., Recchioni, M. C., & Zirilli, F. (2015). The Barone-Adesi Whaley formula to price American options revisited. Applied Mathematics, 6(2), 382-402.
Gerbessiotis, A. V. (2003). Trinomial-tree based parallel option price valuations. Parallel Algorithms and Applications, 18(4), 181-196.
Han Liyan, Mou Hui, & Wang Ying. (2012). Pricing model of convertible bonds based on partial least squares regression and its empirical research. Chinese Journal of Management Science, 4, 81-87.
Ho, T. S., & Pfeffer, D. M. (1996). Convertible bonds: model, value attribution, and analytics. Financial Analysts Journal, 52(5), 35-44.
Hull, J., Nelken, I., & White, A. (2004). Merton’s model, credit risk, and volatility skews. Journal of Credit Risk Volume, 1(1), 05.
Hung, M. W. & Wang, J. Y. (2002). Pricing convertible bonds subject to default risk. The Journal of Derivatives Winer, 10(2), 75-87. https://doi.org/10.3905/jod.2002.319197
Hull, J. C. (2018). The Black-Scholes-Merton Model. Options, Futures, and Other Derivatives, 10th ed. New York: Pearson.
Jiang, W., Zhao, J., & Yang, C. (2012, July 18-21). A research of convertible bonds pricing and risk measures based on investor sentiment. 2012 China International Conference on Insurance and Risk Management, Qingdao, China. http://www.ccirm.org/conference/2012/uploadfiles/B/II-B/5-jw-fp.pdf
Kim, I. J., Jang, B. G., & Kim, K. T. (2013). A simple iterative method for the valuation of American options. Quantitative Finance, 13(6), 885-895.
Kai, L. (2018). Liquidity Risk and the Pricing of Convertible Bonds in China. Pacific-Basin Finance Journal, 50(1), 105-123.
Kazbek, R., Erlangga, Y., Amanbek, Y., & Wei, D. (2024). Pricing Convertible Bonds with the Penalty TF Model Using Finite Element Method. Computational Economics, 1-28.
Liu, Jipeng. (2018). Beware of convertible bonds becoming a new pattern of reducing holdings. Economy, 1, 9-9.
Lin, S., & Zhu, S. P. (2022). Pricing callable–puttable convertible bonds with an integral equation approach. Journal of Futures Markets, 42(10), 1856-1911.
Liu, Q. (2023). Pricing Options Embedded in Corporate Bonds Using the Binomial Method. Econometric Research in Finance, 8(2), 53-67.
Lee, I., Renjie, R. W., & Verwijmeren, P. (2023). How do options add value? Evidence from the convertible bond market. Review of Finance, 27(1), 189-222.
Ministry of Transport. (2020, December 28). Accelerate the construction of a transportation power and play a leading role in building a new development pattern. Baidu. https://baijiahao.baidu.com/s?id=1687319217366123641
Ren, T. X. (2009). An empirical analysis of convertible bond pricing based on Binomial Tree model. Statistics and Decision, 20, 135-136.
Sdg, U. (2019). Sustainable development goals. The energy progress report. Tracking SDG, 7, 805-814.
Shvimer, Y., & Herbon, A. (2020). Comparative empirical study of binomial call-option pricing methods using S&P 500 index data. The North American Journal of Economics and Finance, 51, 101071.
Salami, M. F. (2024). Empirical examination of the Black–Scholes model: evidence from the United States stock market. Frontiers in Applied Mathematics and Statistics, 10, 1216386.
Tsiveriotis, K. and Fernandes, C. (1998) Valuing Convertible Bonds with Credit Risk. Journal of Fixed Income, 8, 95-102
Wu H. (2011). Research on contingent convertible bonds. China Money Market, 3, 51-56.
Zeng, Y. (2013). Research Article An Amended Trinomial Tree Model Based on China Convertible Bonds Market. Research Journal of Applied Sciences, Engineering and Technology, 5(12), 3350-3353.