Convertible Bond Factors Based on Self-Research Pricing Modeling: A New Perspective on Navigating Investment Strategies

Considering the market's research attention on Shanghai and Shenzhen convertible bond underlying, Datayes' Algorithmic Goldworker team has newly introduced 32 factors for Option Attributes - Conversion Valuation.

The new convertible bond factor library is rich in data dimensions, and a new self-developed high-precision Least Squares Monte Carlo pricing model is added, which comprehensively takes into account the strong redemption and downward modification probability of convertible bonds, the restriction period and the details of the terms and conditions, and is used for accurate valuation. And based on BS formula, binomial tree pricing method and Monte Carlo pricing method, the corresponding Greek letter and implied volatility series factors are calculated respectively

alpha and beta of convertible bonds to long and short-term positive stock returns and style factor regressions, measure the difference between convertible bonds and positive stocks, and measure equity/debt, and the sensitivity of convertible bonds to each style factor.

(1) New self-developed Monte Carlo simulation pricing model type factors.

In order to meet clients' needs and improve the completeness of the convertible bond factor library, the newest addition is a self-developed Least Squares Convertible Bond Monte Carlo Simulation Pricing Model, which comprehensively takes into account the triggering conditions, triggering probability, non-triggering restriction period and other terms and conditions of the strong redemption and downward modification clauses of the convertible bonds, and also incorporates importance sampling to reduce the valuation variance and realize accurate pricing.

2) New Greek letter factor.

This time on the new calculation of 13 Greek letter factors, three pricing methods are done. It can be used to measure the sensitivity of convertible bond price to the positive stock price, positive stock volatility, and time.

3) New implied volatility factors for two new pricing methods.

The implied volatility at the time of the launch of the convertible bond factor library is backward-looking using BS pricing, and the corresponding implied volatility factor can actually be launched using any of the pricing methods. We have two existing pricing models, Binomial Tree and Monte Carlo, and four implied volatility series factors are calculated for each of them for a total of eight in this new update.

4) New ALPHA and BETA factors.

This new batch of ALPHA and BETA factors are obtained by regressing the yield of the convertible bonds on the yield series of their underlying stocks, the low conversion premium style factor series, and the low price style factor series, and taking the ALPHA and BETA from them.