Quantitative Models and Construction Methods 1. Model Name: CCBA Pricing Deviation Model - **Model Construction Idea**: The model measures the valuation level of convertible bonds by calculating the pricing deviation, which reflects the difference between the market price and the theoretical price derived from the CCBA model[6] - **Model Construction Process**: The pricing deviation is calculated as: $ \text{Pricing Deviation} = \frac{\text{Convertible Bond Price}}{\text{CCBA Model Price}} - 1 $ This formula evaluates how much the market price deviates from the theoretical price. The CCBA model incorporates factors such as redemption probability adjustments[6][10] - **Model Evaluation**: The model effectively identifies valuation extremes in the convertible bond market, providing insights into market sentiment and potential risks[6][7] 2. Model Name: Convertible Bond & Stock-Bond Rotation Strategy - **Model Construction Idea**: This model uses the pricing deviation to determine the relative attractiveness of convertible bonds versus a stock-bond portfolio, enabling rotation between the two asset classes[10] - **Model Construction Process**: 1. Calculate the Z-score of the pricing deviation: $ Z = \frac{\text{Pricing Deviation}}{\text{3-Year Standard Deviation}} $ 2. Apply a ±1.5 standard deviation cap to the Z-score and normalize it: $ \text{Score} = \frac{Z}{-1.5} $ 3. Determine the convertible bond weight: $ \text{Convertible Bond Weight} = 50\% + 50\% \times \text{Score} $ 4. Allocate the remaining weight to the stock-bond portfolio (50% 7-10Y Treasury + 50% CSI 1000 Total Return Index)[10] - **Model Evaluation**: The strategy demonstrates stable excess returns by dynamically adjusting allocations based on valuation levels[10][13] 3. Model Name: Low Valuation Strategy - **Model Construction Idea**: This strategy selects convertible bonds with the lowest pricing deviation to construct a portfolio, aiming to capture undervalued opportunities[21] - **Model Construction Process**: 1. Use the CCBA_out model (CCBA model adjusted for delisting risk) to calculate pricing deviation: $ \text{Pricing Deviation} = \frac{\text{Convertible Bond Price}}{\text{CCBA_out Model Price}} - 1 $ 2. Select the 15 convertible bonds with the lowest pricing deviation from each of the three market segments (debt-heavy, balanced, equity-heavy), forming a pool of 45 bonds 3. Ensure bonds meet criteria such as a balance of over 300 million and a rating of AA- or above 4. Overweight undervalued segments and underweight overvalued ones[21] - **Model Evaluation**: The strategy achieves strong absolute and excess returns with high stability, even during challenging market conditions[21][24] 4. Model Name: Low Valuation + Strong Momentum Strategy - **Model Construction Idea**: Combines pricing deviation with stock momentum factors to enhance portfolio elasticity and returns[23] - **Model Construction Process**: 1. Use the pricing deviation factor from the CCBA_out model 2. Incorporate stock momentum factors based on the past 1, 3, and 6 months' momentum scores 3. Construct a portfolio by selecting bonds with strong momentum and low valuation[23] - **Model Evaluation**: The strategy delivers higher absolute and excess returns, with increased sensitivity to market trends[23][27] 5. Model Name: Low Valuation + High Turnover Strategy - **Model Construction Idea**: Focuses on convertible bonds with low valuation and high trading activity to capture liquidity-driven opportunities[27] - **Model Construction Process**: 1. Select the bottom 50% of convertible bonds based on pricing deviation 2. Within this pool, prioritize bonds with high turnover using metrics such as: - Convertible bond turnover rate (5-day and 21-day) - Ratio of convertible bond turnover to stock turnover (5-day and 21-day) 3. Construct the portfolio based on these criteria[27][30] - **Model Evaluation**: The strategy achieves robust absolute and excess returns, particularly in liquid market conditions[27][30] 6. Model Name: Balanced Debt-Enhanced Strategy - **Model Construction Idea**: Enhances returns by combining low valuation, turnover, and momentum factors, while excluding equity-heavy bonds[30] - **Model Construction Process**: 1. Select the bottom 50% of convertible bonds based on pricing deviation 2. Exclude equity-heavy bonds to form a debt-heavy pool 3. Apply turnover and momentum factors to the debt-heavy pool 4. For balanced bonds, use turnover factors only[30][33] - **Model Evaluation**: The strategy achieves high absolute returns with controlled volatility and drawdowns, making it suitable for risk-averse investors[30][33] 7. Model Name: Credit Bond Substitution Strategy - **Model Construction Idea**: Replaces convertible bonds with credit bonds when the yield-to-maturity (YTM) of convertible bonds exceeds that of 3-year AA-rated credit bonds by 1%[33] - **Model Construction Process**: 1. Screen convertible bonds with: $ \text{Convertible Bond YTM} + 1\% > \text{3-Year AA Credit Bond YTM} $ 2. Select the top 20 bonds with the highest 1-month stock momentum for allocation 3. Limit individual bond weight to a maximum of 2% 4. Use volatility control methods to reduce short-term drawdowns and allocate remaining weight to credit bonds[33][35] - **Model Evaluation**: The strategy achieves moderate absolute returns with low volatility and drawdowns, making it suitable for conservative investors[33][35] 8. Model Name: Volatility Control Strategy - **Model Construction Idea**: Combines low valuation and strong momentum factors with volatility control to maintain portfolio stability[35] - **Model Construction Process**: 1. Select the top 15 convertible bonds with the highest combined scores of low valuation and strong momentum from each market segment (debt-heavy, balanced, equity-heavy) 2. Combine these enhanced strategies with credit bonds 3. Use volatility control methods to cap portfolio volatility at 4%[35][38] - **Model Evaluation**: The strategy achieves stable absolute returns with low volatility and drawdowns, making it suitable for risk-averse investors[35][38] --- Model Backtest Results 1. CCBA Pricing Deviation Model - Pricing deviation as of January 16, 2026: 12.83%, at the 99.9th percentile since 2018 and 2021[6][10] 2. Convertible Bond & Stock-Bond Rotation Strategy - Current convertible bond premium: 12.83%[10] 3. Low Valuation Strategy - Annualized return: 20.8% - Excess return: 8.9% - Information ratio (IR): 1.51[24] 4. Low Valuation + Strong Momentum Strategy - Annualized return: 24.7% - Excess return: 12.4% - IR: 2.15[27] 5. Low Valuation + High Turnover Strategy - Annualized return: 23.7% - Excess return: 11.5% - IR: 1.85[30] 6. Balanced Debt-Enhanced Strategy - Annualized return: 22.6% - Volatility: 12.1% - Maximum drawdown: 13.9%[33] 7. Credit Bond Substitution Strategy - Annualized return: 7.1% - Volatility: <3% - Maximum drawdown: <3%[35] 8. Volatility Control Strategy - Annualized return: 9.6% - Volatility: 4.4% - Maximum drawdown: 4.4%[38]

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].