An Empirical Study on the Risks of the Chinese Convertible Bond Market

In this paper, we conduct an empirical analysis on the risks of the Chinese convertible bond market by investigating the underpricing of the bonds and identifying risk factors that determine the value of the bonds' embedded options. First, using a model-free approach, we find the evidence of the underpricing for the bonds issued before 2004. However, the evidence is not supported by the bonds issued after 2004, which is very different from the findings observed in the Japanese market. Further, we document that stock volatility and interest rate risk are important factors in pricing the embedded options. Nevertheless, the roles of the two risk factors depend on specific convertible bonds, meaning that appropriate pricing models are necessary for a certain convertible bond.