Pricing Efficiency of Convertible Bonds in China

The paper examines the pricing efficiency of convertible bonds in China by calculating the relative cheapness of the Chinese convertible bonds from 2012 to 2019. Relative cheapness is measured by the difference between the convertible bond’s implied volatility in conversion options and the stock’s look-back annualized volatility. The results show that cheaper convertible bonds significantly outperform more expensive convertible bonds regarding risk-adjusted performance indicators such as the Sharpe ratio, annualized Sortino ratio, and Return-over-Maximum-Drawdown. A simple long-short strategy sorting bonds using this measure can produce an average monthly return of 1.54%.