Advice on research project.
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I have a small research project that I am trying to do with quantlib,
and before I start I'd like some advice on modifying the code. In the Journal of Equity Investment (9/1998), Tsveriotis and Fernades come up with a way of modelling default risk in convertible bonds via two coupled Black-Scholes equations. One that models the convertible bond and one hypothetical security that models the cash only part of the convertible bond. Fortunately the coupling occurs does not involve any of the derivatives and I think I can fit the system into the current finite difference engine. I'm curious if anyone has any thoughts on what to do, and if there are any other parts of quantlib which could be modified to value convertible bonds. I'm starting with Tsveriotis and Fernades models in part because it involves parts of the code that I'm reasonably familar with. In case anyone is wondering, the mini-research project involves the value of convertible bonds on Shanghai. Using the assumption of zero credit risk, there are some papers in Chinese which argue that the value of convertible bonds in Shanghai are undervalued. What I'd like to do is to take the prices and derive an implicit credit risk (which may or may not have anything to do with the actual credit risk. My sense is that what is happening is that the market is taking into account interest rate and inflation risk. These normally aren't taken into account in convertible bond models. What happens in the West is that most convertible bonds tend to be used to finance high risk ventures, and so they seem to start out very much out of the money, whereas in China convertible bonds are used as stock substitutes in part to prevent dilution of ownership of state owned enterprises, and they tended to be issued with the conversion price very close to the stock price. There is also very little chance of credit risk for that one company since these tend to be large state owned enterprises. (There is however the risk that the entire Chinese economy could tank, which I think is part of what is being factored in.) My gut feeling is that in this regime, interest rate risk plays a much more important role that would be the case in the West, and I'm trying to use quantlib to see if this is the case or not. |
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>> My gut feeling is that in this regime, interest rate risk plays a much
>> more important role that would be the case in the West, and I'm trying >> to use quantlib to see if this is the case or not. >>
What are you doing for CNY yield curves ? That was the project I was going to tackle next. I'm a Quantlib newbie but I was going to try and use Quantlib to price CGB's once I got my yield curves going.
It wasn't clear to me that even CGB's can be reasonably priced with the "Hongding" yield curves- liquidity is a bear. Do you know actually know traders who can take advantage of mispricing on convertible bonds in China ? Do they even do that for CGB's ?
Perhaps the "buy-side" is more advanced than the "sell-side?" As for the "sell side", I don't know what they are doing at Bank of China and ICBC, but the 12 joint stockholding banks and the 34 odd city level commercial banks have a long way to go before they need to price bonds for trading purposes, though the most recent China Banking Regulatory Commission mandate on market risk management (www.cbrc.gov.cn) (=BIS96 ) should start whipping all banks into shape.
I have a small research project that I am trying to do with quantlib,
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