Quantitative Models and Construction Methods - **Model Name**: CCBA Pricing Model **Construction Idea**: The model adjusts convertible bond pricing based on redemption probability and market deviation metrics [6][21] **Construction Process**: - Define pricing deviation: $ \text{Pricing Deviation} = \frac{\text{Convertible Bond Price}}{\text{CCBA Model Pricing}} - 1 $ - Adjust for redemption probability to form the CCB_out model - Select convertible bonds with the lowest deviation across three domains: debt-heavy, balanced, and equity-heavy, forming a pool of 45 convertible bonds [6][21] **Evaluation**: The model demonstrates strong stability and consistent returns, even during volatile market conditions [21] - **Model Name**: Convertible Bond & Equity Rotation Strategy **Construction Idea**: Utilize market pricing deviation to dynamically allocate between convertible bonds and a stock-bond portfolio [11][15] **Construction Process**: - Calculate Z-score: $ Z = \frac{\text{Pricing Deviation}}{\text{3-Year Standard Deviation}} $ - Apply truncation at ±1.5 standard deviations and normalize: $ \text{Score} = \frac{Z}{-1.5} $ - Determine convertible bond weight: $ \text{Convertible Bond Weight} = 50\% + 50\% \times \text{Score} $ - Allocate remaining weight to a stock-bond portfolio (50% 7-10Y Treasury + 50% CSI 1000 Total Return Index) [11][15] **Evaluation**: The strategy achieves stable excess returns by overweighting undervalued convertible bonds and underweighting overvalued ones [11][15] Model Backtesting Results - **CCBA Pricing Model**: - Absolute return: 21.3% - Excess return: 10.1% - IR: 1.71 [24] - **Convertible Bond & Equity Rotation Strategy**: - Absolute return: Stable excess returns observed during low valuation periods - Current convertible bond premium: 7.80% [11][15] Quantitative Factors and Construction Methods - **Factor Name**: Convertible Bond Pricing Deviation (CCB_out) **Construction Idea**: Measure deviation between market price and model price, adjusted for redemption probability [21][24] **Construction Process**: - Define deviation: $ \text{Pricing Deviation} = \frac{\text{Convertible Bond Price}}{\text{CCB_out Model Pricing}} - 1 $ - Adjust for redemption probability to refine the factor [21][24] **Evaluation**: The factor effectively identifies undervalued convertible bonds, supporting stable returns [21][24] - **Factor Name**: Stock Momentum **Construction Idea**: Combine convertible bond pricing deviation with stock momentum to enhance strategy elasticity [27][28] **Construction Process**: - Calculate stock momentum scores based on past 1, 3, and 6 months' performance - Combine momentum scores with pricing deviation to form a composite factor [27][28] **Evaluation**: The factor increases strategy elasticity, achieving higher absolute and excess returns [27][28] - **Factor Name**: High Turnover **Construction Idea**: Select convertible bonds with high trading activity within a low-valuation pool [30][31] **Construction Process**: - Define turnover metrics: - Convertible bond turnover rate (5-day and 21-day) - Convertible bond-to-stock turnover ratio (5-day and 21-day) - Combine turnover metrics with pricing deviation to refine selection [30][31] **Evaluation**: The factor enhances strategy responsiveness, achieving consistent excess returns [30][31] Factor Backtesting Results - **Convertible Bond Pricing Deviation (CCB_out)**: - IR: 1.71 - Absolute return: 21.3% [24] - **Stock Momentum**: - IR: 2.31 - Absolute return: 25.0% [28] - **High Turnover**: - IR: 1.96 - Absolute return: 23.6% [31] Strategy Construction and Results - **Strategy Name**: Low Valuation Strategy **Construction Idea**: Select undervalued convertible bonds across three domains (debt-heavy, balanced, equity-heavy) [21][24] **Construction Process**: - Use CCB_out pricing deviation to identify undervalued convertible bonds - Form a pool of 45 convertible bonds with AA- rating or higher and balance above 3 billion [21][24] **Evaluation**: Stable returns with strong excess performance [21][24] - **Strategy Name**: Low Valuation + Strong Momentum Strategy **Construction Idea**: Combine pricing deviation with stock momentum for higher elasticity [27][28] **Construction Process**: - Integrate stock momentum scores (1, 3, 6 months) with pricing deviation - Select convertible bonds with the highest composite scores [27][28] **Evaluation**: Enhanced elasticity and higher returns [27][28] - **Strategy Name**: Low Valuation + High Turnover Strategy **Construction Idea**: Combine pricing deviation with turnover metrics for responsive selection [30][31] **Construction Process**: - Select convertible bonds with high turnover rates within a low-valuation pool - Combine turnover metrics with pricing deviation for refined selection [30][31] **Evaluation**: Consistent excess returns with improved responsiveness [30][31] - **Strategy Name**: Balanced Debt-Heavy Enhanced Strategy **Construction Idea**: Focus on undervalued convertible bonds while enhancing debt-heavy and balanced domains [33][34] **Construction Process**: - Use pricing deviation to select undervalued convertible bonds - Apply turnover and momentum factors for enhancement in debt-heavy and balanced domains [33][34] **Evaluation**: High absolute returns with controlled volatility and drawdowns [33][34] - **Strategy Name**: Credit Bond Substitution Strategy **Construction Idea**: Replace credit bonds with convertible bonds offering higher yields [35][36] **Construction Process**: - Select convertible bonds with $ \text{YTM} + 1\% > \text{3-Year AA Credit Bond YTM} $ - Apply stock momentum and volatility control for portfolio optimization [35][36] **Evaluation**: Stable returns with low volatility and drawdowns [35][36] - **Strategy Name**: Volatility Control Strategy **Construction Idea**: Control portfolio volatility by combining enhanced strategies and credit bonds [37][39] **Construction Process**: - Select convertible bonds with high scores in low valuation + strong momentum - Combine enhanced strategies with credit bonds to control portfolio volatility at 4% [37][39] **Evaluation**: Stable returns with controlled volatility and drawdowns [37][39] Strategy Backtesting Results - **Low Valuation Strategy**: - IR: 1.71 - Absolute return: 21.3% [24] - **Low Valuation + Strong Momentum Strategy**: - IR: 2.31 - Absolute return: 25.0% [28] - **Low Valuation + High Turnover Strategy**: - IR: 1.96 - Absolute return: 23.6% [31] - **Balanced Debt-Heavy Enhanced Strategy**: - Absolute return: 22.4% - Volatility: 12.2% - Drawdown: 13.9% [34] - **Credit Bond Substitution Strategy**: - Absolute return: 7.2% - Volatility: 2.1% - Drawdown: 2.8% [36] - **Volatility Control Strategy**: - Absolute return: 9.7% - Volatility: 4.4% - Drawdown: 4.4% [39]

Core Viewpoint - The convertible bond market has shown strong performance in 2023, with the China Convertible Bond Index rising by 17.14% year-to-date and total trading volume reaching 13.46 trillion yuan, a year-on-year increase of 37.75%. This has led to increased interest in quantitative investment strategies that leverage the unique characteristics of convertible bonds, which offer both offensive and defensive capabilities [1]. Group 1: Why Choose Convertible Bonds? - Convertible bonds are considered high-quality beta assets, with the China Convertible Bond Index significantly outperforming major broad-based indices since 2017. For instance, during the market downturn in 2018, the index only fell by 1.16%, while the CSI 300 and CSI 500 indices dropped by 25.31% and 33.32%, respectively. Conversely, in 2019, the index rose by 25.15%, demonstrating its ability to provide both growth and protection [3][4]. Group 2: Characteristics and Pricing Factors of Convertible Bonds - The core factor influencing the pricing of convertible bonds is the underlying stock price, which directly affects their conversion value. The bonds exhibit a T+0 trading mechanism, allowing for good liquidity and turnover [8][9]. - Convertible bonds have unique contractual advantages, such as downwards adjustment and redemption clauses, which protect investor interests. Issuers typically have a strong incentive to convert bonds into stock, aligning the interests of both issuers and investors [8]. - The embedded bond value of convertible bonds is influenced by the interest rate environment. A decrease in market interest rates enhances the attractiveness of convertible bonds as fixed-income assets, thereby supporting their price [10]. - The supply-demand dynamics in the convertible bond market are crucial. The issuance pace and scale of convertible bonds directly affect market supply, while institutional investors significantly influence demand [11]. Group 3: Common Quantitative Strategies for Convertible Bonds - Quantitative strategies for investing in convertible bonds involve using computer models to systematically identify and execute investment opportunities, minimizing emotional decision-making. Common strategies include: - **Dual Low Strategy**: Focuses on bonds with low prices and low conversion premiums to balance safety and upside potential [12]. - **Low Premium Strategy**: Targets bonds with very low or negative conversion premiums, capitalizing on strong stock performance [12]. - **High YTM Strategy**: Treats convertible bonds as fixed-income securities to secure stable interest income, particularly in bearish or volatile markets [12]. - **Event-Driven Strategy**: Monitors events that may cause price fluctuations, such as earnings announcements or proposed adjustments to conversion prices [12].