Summary of Conference Call on Convertible Bond Market Industry Overview - The convertible bond market is currently experiencing high valuations, positioned above the 90th percentile historically, indicating a very expensive market environment [1][2]. Key Insights and Arguments - **Valuation Dynamics**: The high valuation does not necessarily imply poor short-term performance; however, it suggests lower average returns in the long term. Tactical investors may consider exiting, while those seeking short-term gains should wait for additional signals [1][4]. - **Momentum as an Indicator**: Valuation momentum, defined as the current valuation compared to the 5-day moving average, is crucial for assessing market trends. If the current valuation exceeds the 5-day average, it indicates a potential upward trend in the convertible bond market [5][6]. - **High Valuation Implications**: High valuations typically lead to the worst average returns. For allocation-focused investors, this may be a signal to exit, while short-term investors should wait for further indicators before making decisions [4][2]. - **Operational Strategy**: The strategy should focus on reducing turnover rates. In high valuation ranges (80-100), frequent trading is unnecessary, while in low ranges (1-4), adjustments should be made based on factor performance [9][10]. - **Stop-Loss Mechanism**: A stop-loss mechanism should be established, such as exiting positions if valuations drop below the 80th percentile, to mitigate risks during market downturns [9][10]. Additional Important Points - **Double-Low Strategy**: This strategy is effective in avoiding significant drawdowns during market declines. It involves selling during initial downturns and re-entering when the market recovers, particularly in high valuation environments [11][10]. - **Application of Timing Methods**: The timing method can also be applied to equity-focused strategies, although its effectiveness is less pronounced compared to the double-low strategy. The focus should be on convertible bonds with the lowest premium rates, which often have a higher likelihood of strong redemption [12][13]. - **Investment Logic in Current Environment**: In the current market, if valuations are only fluctuating at high levels, infrequent trading is advisable. If trading is necessary, a high-sell-low-buy approach should be adopted, with caution exercised when valuations drop below predetermined thresholds [14][13].

Quantitative Models and Construction Methods 1. Model Name: Valuation Momentum (Mom) - **Model Construction Idea**: The model aims to capture short-term valuation trends in the convertible bond market by identifying upward or downward momentum in valuation levels[23][27][37] - **Model Construction Process**: - Calculate the 5-day moving average (MA5) of the valuation index[37] - Introduce a buffer to reduce noise: $ MA5_{buf} = MA5 \times (1 + 5/10000) $[37] - Define valuation momentum as: $ Mom = value - MA5_{buf} $[37] - Signal generation: - $ Mom > 0 $: Indicates positive momentum, suggesting a buy/add position[37] - $ Mom \leq 0 $: Indicates insufficient momentum, suggesting hold/reduce position[37] - **Model Evaluation**: The model effectively identifies short-term valuation trends but faces challenges with high turnover rates, making real-world implementation difficult[38][42][50] 2. Model Name: Cross-Sectional Timing Strategy - **Model Construction Idea**: Combines valuation levels and valuation momentum to optimize timing signals for convertible bond investments[46][50] - **Model Construction Process**: - Valuation grouping: Divide the valuation index into quintiles (Q1-Q5) based on historical percentiles[19][46] - Momentum grouping: Divide valuation momentum into quintiles (Q1-Q5) based on historical trends[23][46] - Cross-sectional analysis: Analyze the interaction between valuation levels and momentum to generate signals[46] - Final signal: - Positive momentum ($ Mom > 0 $) and high valuation ($ Q5 $): High allocation to convertible bonds[47][50] - Other scenarios: Adjust allocation based on specific group interactions[46][50] - **Model Evaluation**: The strategy reduces turnover in high-valuation scenarios, improving practical feasibility while maintaining performance[50][51] --- Model Backtesting Results 1. Valuation Momentum (Mom) - **Annualized Return**: 21.13%[57] - **Maximum Drawdown**: 19.69%[57] - **Annualized Volatility**: 17.85%[57] - **Win Rate**: 47.20%[57] - **Calmar Ratio**: 1.07[57] - **Sharpe Ratio**: 1.11[57] 2. Cross-Sectional Timing Strategy - **Annualized Return**: 18.29%[66] - **Maximum Drawdown**: 6.74%[66] - **Annualized Volatility**: 11.32%[66] - **Win Rate**: 48.10%[66] - **Calmar Ratio**: 2.72[66] - **Sharpe Ratio**: 1.45[66] --- Quantitative Factors and Construction Methods 1. Factor Name: Valuation Momentum (Mom) - **Factor Construction Idea**: Measures the short-term trend of valuation levels to identify potential price movements in convertible bonds[23][27][37] - **Factor Construction Process**: - Define valuation momentum as: $ Mom = value - MA5 $[23][27] - Group data into quintiles (Q1-Q5) based on momentum levels[23][27] - **Factor Evaluation**: Positive momentum (Q5) is associated with higher short-term returns, validating the hypothesis that upward valuation trends attract inflows and drive prices higher[25][29] 2. Factor Name: Valuation Percentile - **Factor Construction Idea**: Measures the relative valuation level of convertible bonds over a rolling 250-day window to assess overvaluation or undervaluation[19][46] - **Factor Construction Process**: - Calculate the valuation index for each day[14] - Determine the percentile rank of the current valuation relative to the past 250 days[19] - Group data into quintiles (Q1-Q5) based on percentile ranks[19] - **Factor Evaluation**: High valuation levels (Q5) are associated with lower long-term returns but can still generate positive short-term returns due to market exuberance[19][46] --- Factor Backtesting Results 1. Valuation Momentum (Mom) - **1-Day Return**: - Q1: -0.05%[24] - Q2: 0.00%[24] - Q3: 0.01%[24] - Q4: 0.04%[24] - Q5: 0.14%[24] - **1-Year Return**: - Q1: 5.67%[24] - Q2: 6.53%[24] - Q3: 5.78%[24] - Q4: 5.08%[24] - Q5: 3.83%[24] 2. Valuation Percentile - **1-Week Return**: - Q1: 0.17%[19] - Q2: 0.32%[19] - Q3: 0.16%[19] - Q4: -0.13%[19] - Q5: 0.19%[19] - **1-Year Return**: - Q1: 12.57%[20] - Q2: 9.21%[20] - Q3: 5.35%[20] - Q4: 2.52%[20] - Q5: 2.21%[20]