Valuation Analysis of Convertible Bonds in China: Does Theoretical Value Deviate from Actual Market Price?

This study compares the theoretical valuation with the actual price of 30 convertible bonds from the Chinese market in 2019. Based on Black-Scholes Model, Cox, Ross and Rubinstein model and Monte Carlo simulation approach, our result shows: First, the stepwise regression and Monte Carlo simulation are closest to the actual market price, with the lowest deviation rate of 0.078% and -9.09%, respectively. Second, this paper also analyses the deviation between the theoretical and the actual market price. It is found that maturity is an essential factor affecting the value of convertible bonds, and it is the most underestimated on the first day of issuance. However, the degree of underestimation gradually diminishes as the life span of the bond decreases over time. Third, the deviation between the actual and theoretical price is that valuation models occur as the models seldom consider embedded call options, sell-back terms and redemption terms. As a policy implication, the price discrepancies between theoretical and actual prices should be monitored continuously by the regulators and market practitioners in China's financial markets.