Quantitative Models and Construction Methods - **Model Name**: Convertible Bond Pricing Deviation Model **Construction Idea**: The model measures the valuation level of convertible bonds based on pricing deviation, defined as the difference between the market price and the theoretical price derived from the CCBA model[6][11] **Construction Process**: - Formula: $ Pricing\ Deviation = \frac{Convertible\ Bond\ Price}{CCBA\ Model\ Price} - 1 $ - Parameters: Convertible bond price represents the market price, and CCBA model price represents the theoretical price adjusted for redemption probability[6][11] **Evaluation**: The model effectively identifies high valuation levels in the convertible bond market, providing insights for timing and allocation strategies[6][11] - **Model Name**: Convertible Bond & Equity-Bond Rotation Strategy **Construction Idea**: The strategy allocates between convertible bonds and a 50% equity-50% bond portfolio based on valuation levels, aiming to achieve stable excess returns[9][11] **Construction Process**: - Formula: $ Z\ Value = \frac{Pricing\ Deviation}{3\ Year\ Standard\ Deviation} $ - Adjustments: Apply ±1.5 standard deviation truncation, divide by -1.5 to calculate the score, and determine convertible bond weight as $ Convertible\ Bond\ Weight = 50\% + 50\% \times Score $ - Remaining allocation is invested in the equity-bond portfolio[11] **Evaluation**: The strategy demonstrates stable excess returns during periods of undervaluation, while reducing exposure during overvaluation[11][15] Model Backtesting Results - **Convertible Bond Pricing Deviation Model**: Current pricing deviation is 4.92%, ranking at the 98.6% percentile since 2018[6][11] - **Convertible Bond & Equity-Bond Rotation Strategy**: - Annualized return: 9.7% - Excess return: 11.5% - Information ratio (IR): 2.00[11][15] Quantitative Factors and Construction Methods - **Factor Name**: CCB_out Pricing Deviation **Construction Idea**: Adjust the CCBA pricing model by incorporating delisting risk to refine valuation deviation[22] **Construction Process**: - Formula: $ Pricing\ Deviation = \frac{Convertible\ Bond\ Price}{CCB\_out\ Model\ Price} - 1 $ - Parameters: CCB_out model price includes adjustments for delisting risk[22] **Evaluation**: The factor enhances the accuracy of valuation deviation, supporting low-valuation strategies[22] - **Factor Name**: Stock Momentum **Construction Idea**: Combine stock momentum scores over 1, 3, and 6 months to identify high-momentum convertible bonds[25][28] **Construction Process**: - Formula: $ Momentum\ Score = Equal\ Weighted\ Average\ of\ 1, 3, 6\ Month\ Returns $ - Parameters: Historical stock returns over specified periods[25][28] **Evaluation**: The factor improves strategy elasticity and enhances returns during strong market trends[25][28] - **Factor Name**: Convertible Bond Turnover **Construction Idea**: Select convertible bonds with high trading activity to capture liquidity premiums[31][32] **Construction Process**: - Metrics: 5-day and 21-day turnover rates for convertible bonds and their underlying stocks - Formula: $ Turnover\ Ratio = \frac{Convertible\ Bond\ Turnover}{Stock\ Turnover} $ - Parameters: Turnover rates over specified periods[31][32] **Evaluation**: The factor effectively identifies active bonds, contributing to higher returns and lower risk[31][32] Factor Backtesting Results - **CCB_out Pricing Deviation**: - Annualized return: 22.3% - Excess return: 11.5% - IR: 2.00[22][25] - **Stock Momentum**: - Annualized return: 24.5% - Excess return: 13.5% - IR: 2.23[25][28] - **Convertible Bond Turnover**: - Annualized return: 25.0% - Excess return: 13.6% - IR: 2.16[31][32] Composite Strategies and Construction Methods - **Strategy Name**: Low Valuation Strategy **Construction Idea**: Select convertible bonds with the lowest valuation deviation across three market segments (low debt, balanced, high equity)[22] **Construction Process**: - Select the 15 lowest valuation deviation bonds in each segment - Apply filters: balance above 3 billion and rating of AA- or higher[22] **Evaluation**: The strategy achieves strong stability and consistent excess returns, even during challenging market conditions[22] - **Strategy Name**: Low Valuation + Strong Momentum Strategy **Construction Idea**: Combine valuation deviation and stock momentum factors to enhance elasticity[25] **Construction Process**: - Select bonds with low valuation deviation and high stock momentum scores - Apply filters: balance above 3 billion and rating of AA- or higher[25] **Evaluation**: The strategy demonstrates high elasticity and strong performance during bullish market conditions[25] - **Strategy Name**: Low Valuation + High Turnover Strategy **Construction Idea**: Combine valuation deviation and turnover factors to capture liquidity premiums[31] **Construction Process**: - Select bonds with low valuation deviation and high turnover rates - Apply filters: balance above 3 billion and rating of AA- or higher[31] **Evaluation**: The strategy achieves high returns and stable performance, particularly in active markets[31] - **Strategy Name**: Balanced Debt-Enhanced Strategy **Construction Idea**: Focus on low-valuation convertible bonds while enhancing debt and balanced segments with turnover and momentum factors[36] **Construction Process**: - Select the lowest 50% valuation bonds - Apply turnover and momentum factors in debt and balanced segments[36] **Evaluation**: The strategy achieves high absolute returns with controlled volatility and drawdowns[36] - **Strategy Name**: Credit Bond Substitution Strategy **Construction Idea**: Replace convertible bonds with credit bonds when yield-to-maturity (YTM) exceeds AA-rated credit bonds by 1%[40] **Construction Process**: - Select convertible bonds with YTM+1% > 3-year AA-rated credit bond YTM - Apply stock momentum factor to select the top 20 bonds[40] **Evaluation**: The strategy achieves stable returns with low volatility and drawdowns[40] - **Strategy Name**: Volatility Control Strategy **Construction Idea**: Combine enhanced debt, balanced, and equity strategies with credit bonds to control portfolio volatility[44] **Construction Process**: - Select top 15 bonds in each segment based on valuation deviation and momentum scores - Allocate remaining portfolio to credit bonds - Control portfolio volatility at 4%[44] **Evaluation**: The strategy achieves stable returns with controlled risk metrics[44] Strategy Backtesting Results - **Low Valuation Strategy**: - Annualized return: 22.3% - Excess return: 11.5% - IR: 2.00[22][25] - **Low Valuation + Strong Momentum Strategy**: - Annualized return: 24.5% - Excess return: 13.5% - IR: 2.23[25][28] - **Low Valuation + High Turnover Strategy**: - Annualized return: 25.0% - Excess return: 13.6% - IR: 2.16[31][32] - **Balanced Debt-Enhanced Strategy**: - Annualized return: 23.6% - Volatility: 12.2% - Maximum drawdown: 13.4%[36][39] - **Credit Bond Substitution Strategy**: - Annualized return: 7.3% - Volatility: 2.1% - Maximum drawdown: 2.8%[40][43] - **Volatility Control Strategy**: - Annualized return: 9.9% - Volatility: 4.4% - Maximum drawdown: 4.2%[44][45]

Quantitative Models and Construction Methods 1. Model Name: CCBA Pricing Model - **Model Construction Idea**: The CCBA pricing model is used to calculate the pricing deviation of convertible bonds, defined as the difference between the market price and the model price, adjusted for redemption probability[6][24] - **Model Construction Process**: - The pricing deviation is calculated as: $ Pricing\ Deviation = \frac{Convertible\ Bond\ Price}{CCBA\ Model\ Price} - 1 $ - Here, the "Convertible Bond Price" represents the market price of the bond, and the "CCBA Model Price" is derived from the CCBA pricing model[6][24] - The model incorporates historical volatility as a central parameter to determine the deviation level[7] - **Model Evaluation**: The model effectively identifies valuation ranges for convertible bonds, providing insights into their relative attractiveness[6] 2. Model Name: CCB_out Pricing Model - **Model Construction Idea**: This model builds upon the CCBA model by incorporating delisting risk to refine the pricing deviation calculation[24] - **Model Construction Process**: - The pricing deviation is calculated as: $ Pricing\ Deviation = \frac{Convertible\ Bond\ Price}{CCB\_out\ Model\ Price} - 1 $ - The "CCB_out Model Price" adjusts the CCBA model price by accounting for delisting probabilities[24] - Convertible bonds are categorized into three domains: debt-biased, balanced, and equity-biased, with the lowest deviation bonds selected for each domain[24] - **Model Evaluation**: The model demonstrates strong stability and adaptability, achieving consistent returns even in volatile market conditions[24] 3. Model Name: Return Decomposition Model - **Model Construction Idea**: This model decomposes the returns of convertible bonds into three components: bond floor returns, equity-driven returns, and valuation-driven returns[17] - **Model Construction Process**: - The model uses historical data to separate the total return of convertible bonds into: - Bond floor returns, representing the fixed-income component - Equity-driven returns, reflecting the impact of the underlying stock's performance - Valuation-driven returns, capturing changes in the bond's relative pricing[17][21] - **Model Evaluation**: The model provides a detailed understanding of the drivers of convertible bond performance, aiding in strategy optimization[17] --- Quantitative Factors and Construction Methods 1. Factor Name: Pricing Deviation Factor (CCB_out) - **Factor Construction Idea**: Measures the relative valuation of convertible bonds by comparing market prices to model-derived prices[24] - **Factor Construction Process**: - The factor is calculated as: $ Pricing\ Deviation = \frac{Convertible\ Bond\ Price}{CCB\_out\ Model\ Price} - 1 $ - Bonds with the lowest deviation are selected for further analysis[24] - **Factor Evaluation**: The factor effectively identifies undervalued bonds, contributing to the success of valuation-based strategies[24] 2. Factor Name: Momentum Factor - **Factor Construction Idea**: Captures the price momentum of the underlying stock over different time horizons[29] - **Factor Construction Process**: - Momentum scores are calculated based on the stock's returns over the past 1, 3, and 6 months, with equal weighting applied to each period[29] - **Factor Evaluation**: The factor enhances the responsiveness of valuation-based strategies, improving their adaptability to market trends[29] 3. Factor Name: Turnover Factor - **Factor Construction Idea**: Measures the trading activity of convertible bonds to identify liquidity and investor interest[33] - **Factor Construction Process**: - The factor is derived from: - Bond turnover rates over 5-day and 21-day periods - The ratio of bond turnover to stock turnover over the same periods[33] - **Factor Evaluation**: The factor effectively identifies actively traded bonds, improving the liquidity profile of selected portfolios[33] --- Backtesting Results of Models 1. CCBA Pricing Model - **Annualized Return**: 8.6% - **Annualized Volatility**: 11.6% - **Maximum Drawdown**: 19.9% - **Information Ratio (IR)**: Not explicitly provided[6] 2. CCB_out Pricing Model - **Annualized Return**: 21.8% - **Annualized Volatility**: 13.6% - **Maximum Drawdown**: 15.6% - **Information Ratio (IR)**: 2.10[27] 3. Return Decomposition Model - **Annualized Return**: Not explicitly provided - **Annualized Volatility**: Not explicitly provided - **Maximum Drawdown**: Not explicitly provided - **Information Ratio (IR)**: Not explicitly provided[17] --- Backtesting Results of Factors 1. Pricing Deviation Factor (CCB_out) - **Annualized Return**: 21.8% - **Annualized Volatility**: 13.6% - **Maximum Drawdown**: 15.6% - **Information Ratio (IR)**: 2.10[27] 2. Momentum Factor - **Annualized Return**: 24.5% - **Annualized Volatility**: 14.3% - **Maximum Drawdown**: 11.9% - **Information Ratio (IR)**: 2.39[31] 3. Turnover Factor - **Annualized Return**: 23.4% - **Annualized Volatility**: 15.4% - **Maximum Drawdown**: 15.9% - **Information Ratio (IR)**: 2.15[35]

Quantitative Models and Construction 1. Model Name: CCBA Pricing Deviation Model - **Model Construction Idea**: The model evaluates the valuation level of convertible bonds by calculating the pricing deviation, which is defined as the difference between the market price and the model price derived from the CCBA model[6] - **Model Construction Process**: - Pricing deviation is calculated as: $ Pricing\ Deviation = \frac{Convertible\ Bond\ Price}{CCBA\ Model\ Price} - 1 $ - Here, "Convertible Bond Price" represents the market price of the bond, and "CCBA Model Price" is the theoretical price derived from the CCBA model[6] - Historical data is used to determine the percentile levels of the pricing deviation, and the future returns of convertible bonds are analyzed based on different deviation intervals[6][9] - **Model Evaluation**: The model indicates that the current convertible bond market is in a moderately valued range, with a pricing deviation of 0.2%, corresponding to the 58.3% and 48.3% percentiles for the periods since 2018 and 2021, respectively[6] 2. Model Name: Regression Model for Convertible Bond Returns - **Model Construction Idea**: This model uses pricing deviation and YTM spread as explanatory variables to predict the future six-month returns of convertible bonds[12] - **Model Construction Process**: - The regression model is constructed with the following variables: - Explanatory variables: Pricing deviation and YTM spread - Dependent variable: Future six-month returns of convertible bonds - The regression includes sign constraints to ensure the model aligns with economic intuition[12] - **Model Evaluation**: The model demonstrates that convertible bonds in low-price, low-valuation intervals tend to have higher expected returns. However, the current prediction for the next six months is neutral, with an expected return of 0.58%[12] 3. Model Name: Return Decomposition Model - **Model Construction Idea**: This model decomposes the returns of convertible bonds into three components: bond floor returns, equity-driven returns, and valuation-driven returns[15] - **Model Construction Process**: - The model uses the CCB model to calculate the bond floor and equity-driven returns, while the valuation-driven returns are derived as the residual[15] - **Model Evaluation**: The model highlights that in the past month, equity-driven returns contributed -0.79%, and valuation-driven returns contributed -1.55% to the overall performance of the convertible bond index[15][19] --- Quantitative Factors and Construction 1. Factor Name: CCB_Out Pricing Deviation - **Factor Construction Idea**: This factor adjusts the CCBA pricing deviation by incorporating delisting risks to improve valuation accuracy[22] - **Factor Construction Process**: - The adjusted pricing deviation is calculated as: $ Adjusted\ Pricing\ Deviation = \frac{Convertible\ Bond\ Price}{CCB\_Out\ Model\ Price} - 1 $ - Here, "CCB_Out Model Price" accounts for delisting risks in the theoretical pricing[22] - **Factor Evaluation**: The factor is used in multiple strategies, such as low-valuation strategies, to identify undervalued convertible bonds. It has demonstrated strong stability and performance over time[22] 2. Factor Name: Momentum Factor - **Factor Construction Idea**: This factor captures the momentum of the underlying stock prices of convertible bonds over different time horizons[25] - **Factor Construction Process**: - Momentum scores are calculated based on the equal-weighted returns of the underlying stocks over the past 1, 3, and 6 months[25] - **Factor Evaluation**: When combined with the adjusted pricing deviation factor, the momentum factor enhances the elasticity of strategies, leading to higher returns in certain market conditions[25] 3. Factor Name: Turnover Factor - **Factor Construction Idea**: This factor identifies convertible bonds with high trading activity, which may indicate better liquidity and market interest[30] - **Factor Construction Process**: - The turnover factor is calculated using: - Convertible bond turnover rates over 5 and 21 days - The ratio of convertible bond turnover to stock turnover over the same periods[30] - **Factor Evaluation**: The factor is particularly effective in identifying high-liquidity bonds within low-valuation pools, contributing to the success of high-turnover strategies[30] --- Backtesting Results of Models 1. CCBA Pricing Deviation Model - **Six-Month Average Return**: 1.5% - **Six-Month Win Rate**: 72%[6][9][11] 2. Regression Model for Convertible Bond Returns - **Expected Six-Month Return**: 0.58% - **Optimistic Scenario**: 3.91% - **Pessimistic Scenario**: -3.06%[12] 3. Return Decomposition Model - **Equity-Driven Return (Past Month)**: -0.79% - **Valuation-Driven Return (Past Month)**: -1.55%[15][19] --- Backtesting Results of Factors 1. CCB_Out Pricing Deviation - **Annualized Return (2018-2025)**: 21.8% - **Annualized Excess Return**: 12.4% - **IR**: 2.12[25] 2. Momentum Factor - **Annualized Return (2018-2025)**: 24.5% - **Annualized Excess Return**: 14.9% - **IR**: 2.41[29] 3. Turnover Factor - **Annualized Return (2018-2025)**: 23.2% - **Annualized Excess Return**: 13.8% - **IR**: 2.15[33]