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Stochastic volatility vs. jump diffusions: Evidence from the Chinese convertible bond market

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  • Fan, Chenxi
  • Luo, Xingguo
  • Wu, Qingbiao

Abstract

In this paper, we compare three convertible pricing models, including the constant volatility model, the stochastic volatility model and the jump-diffusion model, by using Chinese convertible bond data from 2002 to 2013. In particular, we conduct both in-sample and out-of-sample tests to evaluate these models. We find that the stochastic volatility model performs better than the other two in terms of in-sample fitting, with relative errors 91% (85%) smaller than those for the constant volatility (jump-diffusion) model. Besides, the out-of-sample forecasts also support evidence on stochastic volatility for some bonds, with error reduction as large as 46%.

Suggested Citation

  • Fan, Chenxi & Luo, Xingguo & Wu, Qingbiao, 2017. "Stochastic volatility vs. jump diffusions: Evidence from the Chinese convertible bond market," International Review of Economics & Finance, Elsevier, vol. 49(C), pages 1-16.
    • Handle: RePEc:eee:reveco:v:49:y:2017:i:c:p:1-16
    DOI: 10.1016/j.iref.2016.04.009
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    Cited by:

    1. Lin, Chung-Gee & Chang, Chia-Chang, 2020. "Approximate analytic solution for Asian options with stochastic volatility," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    2. Chen, Son-Nan & Hsu, Pao-Peng, 2018. "Pricing and hedging barrier options under a Markov-modulated double exponential jump diffusion-CIR model," International Review of Economics & Finance, Elsevier, vol. 56(C), pages 330-346.
    3. Xiaoyu Tan & Zili Zhang & Xuejun Zhao & Shuyi Wang, 2022. "DeepPricing: pricing convertible bonds based on financial time-series generative adversarial networks," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-38, December.
    4. Hsiang-Hsi Liu & Yu-Cheng Lin, 2021. "Relationships among US S&P500 Stock Index, its Futures and NASDAQ Index Futures with Volatility Spillover and Jump Diffusion: Modeling and Hedging Performance," Bulletin of Applied Economics, Risk Market Journals, vol. 8(1), pages 121-148.

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    More about this item

    Keywords

    Convertible bond pricing; Chinese market; Stochastic volatility; Jump diffusions; Monte Carlo simulation;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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