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Discrete Dynamics in Nature and Society
Volume 2014 (2014), Article ID 492134, 5 pages
http://dx.doi.org/10.1155/2014/492134
Research Article

Pricing Chinese Convertible Bonds with Dynamic Credit Risk

School of Economics and Management, Beihang University, Beijing 100191, China

Received 14 March 2014; Accepted 23 May 2014; Published 9 June 2014

Academic Editor: Chuangxia Huang

Copyright © 2014 Ping Li and Jing Song. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Abstract

To price convertible bonds more precisely, least squares Monte Carlo (LSM) method is used in this paper for its advantage in handling the dependence of derivatives on the path, and dynamic credit risk is used to replace the fixed one to make the value of convertible bonds reflect the real credit risk. In the empirical study, we price convertible bonds based on static credit risk and dynamic credit risk, respectively. Empirical results indicate that the ICBC convertible bond has been overpriced, resulting from the underestimation of credit risk. In addition, when there is an issue of dividend, the conversion price will change in China's convertible bonds, while it does not change in the international convertible bonds. So we also empirically study the difference between the convertible bond's prices by assuming whether the conversion price changes or not.