Convertible Bond Rotation Using Equity-Bond Signals and Time-Series Momentum

Summary

The document describes a rotation strategy for Chinese convertible bonds, which can behave more like equity or more like fixed income depending on their conversion and bond premiums. It groups bonds as equity-oriented, bond-oriented, or balanced, and says the convertible-bond index tends to move inversely with conversion premium and in the same direction as pure-bond premium. A basic strategy uses changes in these characteristics to infer whether the market’s equity or bond behavior is strengthening. The study also adds time-series momentum, noting autocorrelation in the index, and combines the two approaches. Its reported backtests favor equity-oriented bonds; a revised version holds those bonds when the signal is positive and fixed-income assets otherwise. The document reports historical return, information-ratio, win-rate, and drawdown statistics, and says trading averaged about six days per month. These are in-sample historical claims, not evidence of future performance. The authors caution that changing market conditions could make the model ineffective.

Key ideas

• Convertible bonds can be classified by whether their behavior is more equity-like or bond-like.
• The study relates the convertible-bond index to conversion and pure-bond premiums.
• A rotation signal is combined with time-series momentum based on observed index autocorrelation.
• Reported strategy gains came mainly from equity-oriented convertible bonds; bond-oriented holdings contributed little.
• The revised strategy switches between equity-oriented bonds and fixed-income assets according to the signal.
• Historical backtest results may not persist when market conditions change.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.