An Empirical Study on the Efficiency of China's Convertible Bond Market

Authors: Yi Wu and Bin Zhao*

DOI: 10.23880/oajda-16000128

Volume 2, Issue 1

Abstract

Since 2017, with the increased demand for margin financing and securities lending in the capital market and the improvement of relevant regulations, China's convertible bond market has experienced a boom. As of March 9, 2024, China has issued a total of 823 convertible bonds, amounting to 1.3 trillion yuan. The stock of convertible bonds has expanded from 24 bonds totalling 55.9 billion yuan at the end of 2016 to 553 bonds totalling 853.3 billion yuan. The importance of convertible bonds in the capital market has become increasingly prominent, becoming an essential part of financial tool diversification and market development. However, academic research on the convertible bond market is relatively scarce, mostly focusing on pricing mechanisms, financing effects, and the impact on the underlying stock prices, with little attention paid to the market itself. This paper uses runs tests, autocorrelation tests, and variance ratio tests to analyze the efficiency of China's convertible bond market. By examining whether the daily returns of the convertible bond index follow a random walk, the paper tests if the market is weak-form efficient. The results show that China's convertible bond market has not reached weak-form efficiency. Subsequently, a new index sample was created from the top ten convertible bonds by trading volume in May 2024, and its daily returns were tested for adherence to the random walk model. The results were compared to the overall market's convertible bond index returns in the same period of 2023 to identify factors influencing market efficiency, providing directions and insights for future research.

Keywords: Convertible Bonds; Market Efficiency Theory; Weak-Form Efficiency Test

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