Pricing Chinese convertible bonds with default intensity by Monte Carlo method

DOI10.1155/2019/8610126MaRDI QIDQ2296580zbMATH OpenOpenAlexWikidataFDO

Authors Xin Luo, Jinlin Zhang

Publication date 18 February 2020

Published in Discrete Dynamics in Nature and Society (Search for Journal in Brave)

Copyright license Creative Commons Attribution 4.0 International

Full work available at URL https://doi.org/10.1155/2019/8610126

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Numerical methods (including Monte Carlo methods) (91G60)

Review text

Summary: This article proposes a new way to price Chinese convertible bonds by the Longstaff-Schwartz Least Squares Monte Carlo simulation. The default intensity and the volatility are the two important parameters, which are difficultly obtained in the emerging market, in pricing convertible bonds. By developing the Merton theory, we find a new effective method to get the theoretical value of the two parameters. In the pricing method, the default risk is described by the default intensity, and a default on a bond is triggered by the bottom \(\mathrm{Q}(\mathrm{T})\) (default probability) percentile of the simulated stock prices at the maturity date. In the present simulation, a risk-free interest rate is used to discount the cash flows. So, the new pricing model is considered to tally with the general pricing rule under martingale measure. The empirical results of the CEB and the XIG convertible bonds by the proposed method are compared with those obtained by the credit spreads method. It is also found that the theoretical prices calculated by the method proposed in the article fit the market prices well, especially, in the long run tendency.

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Cites work

• Valuing American options by simulation: a simple least-squares approach

Cited in

(8)

• Valuing convertible bonds based on LSRQM method
• Monte Carlo analysis of convertible bonds with reset clauses
• Monte Carlo simulation approach on pricing the convertible bonds
• Valuation model for Chinese convertible bonds with soft call/put provision under the hybrid willow tree
• Pricing approach to exotic options and China's convertible bonds
• Nonparametric estimation on convertible bond valuations
• Beyond rocket science: a factor model for convertible bond returns
• Fast and efficient numerical method for the penalty Tsiveriotis-Fernandes model

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