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]

- The report discusses the valuation of convertible bonds (CB) using the pricing deviation indicator, which is calculated as the ratio of the CB price to the CCBA model price minus one. As of August 15, 2025, the pricing deviation indicator for the CB market is 5.42%, placing it in the 99.9th percentile since 2018, indicating a high valuation zone[6] - The report also mentions a rotation strategy between CBs and a stock-bond portfolio based on the pricing deviation indicator. The strategy involves calculating a Z-score from the pricing deviation and its standard deviation over the past three years, then adjusting the CB weight accordingly. This strategy has historically generated stable excess returns[21][23] - The report evaluates different CB strategies, including a low-valuation strategy, a low-valuation plus strong momentum strategy, a low-valuation plus high turnover strategy, a balanced debt-enhanced strategy, a credit bond replacement strategy, and a volatility control strategy. Each strategy is constructed using specific factors and has shown varying degrees of absolute and excess returns since 2018[33][36][40][44][48][52] Model and Factor Construction 1. **Pricing Deviation Indicator**: - **Construction Idea**: Measure the deviation of CB prices from their theoretical values - **Construction Process**: - Calculate the pricing deviation as follows: $ \text{Pricing Deviation} = \frac{\text{CB Price}}{\text{CCBA Model Price}} - 1 $ - Use this indicator to assess the valuation level of the CB market[6] - **Evaluation**: Indicates that the CB market is currently in a high valuation zone[6] 2. **Rotation Strategy Between CBs and Stock-Bond Portfolio**: - **Construction Idea**: Rotate between CBs and a stock-bond portfolio based on CB valuation - **Construction Process**: - Calculate the Z-score of the pricing deviation: $ Z = \frac{\text{Pricing Deviation}}{\text{Standard Deviation (3 years)}} $ - Adjust the CB weight using the Z-score: $ \text{CB Weight} = 50\% + 50\% \times \text{Z-score} $ - Allocate the remaining weight to the stock-bond portfolio[21] - **Evaluation**: This strategy has historically generated stable excess returns[21][23] 3. **Low-Valuation Strategy**: - **Construction Idea**: Select CBs with the lowest valuation deviations - **Construction Process**: - Use the CCB_out model to calculate the pricing deviation: $ \text{Pricing Deviation} = \frac{\text{CB Price}}{\text{CCB_out Model Price}} - 1 $ - Select the 15 CBs with the lowest deviations in each of the debt, balanced, and equity-biased categories (total 45 CBs) - Ensure the selected CBs have a balance of over 300 million and a rating of AA- or above[33] - **Evaluation**: This strategy has shown strong stability and significant absolute and excess returns since 2018[33] 4. **Low-Valuation + Strong Momentum Strategy**: - **Construction Idea**: Combine low valuation with strong momentum for higher elasticity - **Construction Process**: - Combine the pricing deviation factor with the stock momentum factor (1, 3, 6 months) - Select CBs based on combined scores[36] - **Evaluation**: This strategy has shown strong elasticity and significant absolute and excess returns since 2018[36] 5. **Low-Valuation + High Turnover Strategy**: - **Construction Idea**: Combine low valuation with high turnover for higher liquidity - **Construction Process**: - Select the lowest 50% valuation CBs - Within this pool, select CBs with the highest turnover rates (5, 21 days) and the highest CB to stock turnover ratios (5, 21 days)[40] - **Evaluation**: This strategy has shown stable excess returns and significant absolute returns since 2018[40] 6. **Balanced Debt-Enhanced Strategy**: - **Construction Idea**: Enhance returns by combining low valuation with turnover and momentum factors - **Construction Process**: - Select the lowest 50% valuation CBs, excluding equity-biased CBs - Use turnover and momentum factors for debt-biased CBs and turnover factors for balanced CBs[44] - **Evaluation**: This strategy has shown significant absolute returns with low volatility and drawdown since 2018[44] 7. **Credit Bond Replacement Strategy**: - **Construction Idea**: Replace credit bonds with CBs for higher returns - **Construction Process**: - Select CBs with YTM + 1% greater than 3-year AA credit bond YTM - Ensure selected CBs have a balance of over 300 million and a rating of AA- or above - Select the top 20 CBs based on 1-month stock momentum, with a maximum weight of 2% per CB - Use volatility control to reduce short-term drawdown, allocate remaining weight to credit bonds[48] - **Evaluation**: This strategy has shown stable returns with low volatility and drawdown since 2018[48] 8. **Volatility Control Strategy**: - **Construction Idea**: Control portfolio volatility while enhancing returns - **Construction Process**: - Select the top 15 CBs in each of the debt, balanced, and equity-biased categories based on low valuation and strong momentum scores - Use volatility control to maintain portfolio volatility at 4% - Allocate remaining weight to credit bonds[52] - **Evaluation**: This strategy has shown stable returns with controlled volatility and drawdown since 2018[52] Model and Factor Backtest Results 1. **Low-Valuation Strategy**: - **Annualized Return**: 23.0% - **Annualized Volatility**: 13.5% - **Maximum Drawdown**: 15.6% - **Excess Return**: 11.9% - **IR**: 2.08[36] 2. **Low-Valuation + Strong Momentum Strategy**: - **Annualized Return**: 25.4% - **Annualized Volatility**: 14.2% - **Maximum Drawdown**: 11.9% - **Excess Return**: 14.0% - **IR**: 2.32[40] 3. **Low-Valuation + High Turnover Strategy**: - **Annualized Return**: 25.2% - **Annualized Volatility**: 15.2% - **Maximum Drawdown**: 15.9% - **Excess Return**: 13.9% - **IR**: 2.20[44] 4. **Balanced Debt-Enhanced Strategy**: - **Annualized Return**: 23.2% - **Annualized Volatility**: 12.2% - **Maximum Drawdown**: 13.4% - **IR**: Not provided[48] 5. **Credit Bond Replacement Strategy**: - **Annualized Return**: 7.5% - **Annualized Volatility**: 2.1% - **Maximum Drawdown**: 2.8% - **IR**: Not provided[52] 6. **Volatility Control Strategy**: - **Annualized Return**: 10.2% - **Annualized Volatility**: 4.4% - **Maximum Drawdown**: 4.2% - **IR**: Not provided[56]