The Impact of Market Heat on the Equity Intensity of Convertible Bonds

Abstract

This paper examines how market heat-broad swings in market-wide investor sentiment-affects the equity intensity of Chinese convertible bonds over 2017 to 2023. Equity intensity captures how closely a convertible’s price tracks its underlying stock rather than behaving like straight debt; it is the defining feature of these hybrid instruments, and it shifts with market conditions. The study uses panel data on 742 A-share convertible bonds, estimating bond-level fixed-effects regressions with standard errors clustered at the bond level. Market heat is measured as the trailing 60-day cumulative return on the CSI 300, and equity intensity as the 60-day rolling correlation between bond and stock returns. The results show that hotter markets lower equity intensity (β = -0.052, p = 0.002): a one-standard-deviation rise in market heat cuts equity intensity by about 2.5% of its standard deviation. Interaction terms reveal that the effect runs through two channels-a bond-floor effect and an option-value effect. Taken together, the findings suggest market-wide sentiment does not only move stock prices; it also reshapes the equity–debt mix of hybrid instruments, with consequences for convertible bond pricing and portfolio decisions.