An Examination of the CB Pricing Efficiency in Taiwan

Abstract

Convertible bonds (CBs) have gradually become a major funding tool for Taiwan corporations in recent years. The complexity of this hybrid instrument, as well as the unique conversion procedure involved, make the valuation of GB difficult for many local investors. Anecdotal evidence shows seemingly arbitrage opportunities for GB trading and its periodically erratic price movements also convinced many that the instrument may be mispriced in the market. In this study, we take on the issue of pricing efficiency of CBs in Taiwan and investigate the validity of those claims. Using a sample of local convertibles, we first examine the consistency of GB market prices and then investigate their price behavior for possible violations of pricing efficiency. Our results support pricing efficiency of CBs in. Taiwan.