Research ArticleOpen AccessGoogle Scholar indexed
Dynamic Arbitrageurs’ Long-Run Impacts on Convertible Bond Issuers’ Stock Prices
University of Nevada, Reno, Reno, NV, USA
- 1 University of Nevada, Reno, Reno, NV, USA
Theoretical Economics Letters·Volume 08 (2018)·Pages 1553–1564·Published 11 June 2018·DOI10.4236/tel.2018.89099
Copy link · social · email
Abstract
I examine convertible bond arbitrageurs’ long-run impact on convertible bond issuers’ stock prices. I find a negative relation between arbitrage activity around convertible bond issues and convertible bond issuers’ long-run stock returns. Average three-year holding period return of convertible bond issuers with no-arbitrage activity around their convertible bond issues is two times larger than that of convertible bond issuers with arbitrage activity around their convertible bond issues. Overall, I show that convertible bond arbitrageurs’ price impact is not limited to short-term [1] , but it also has a long-term component.
KeywordsConvertible BondStock Prices
- Duca, E., Dutordoir, M., Veld, C. and Verwijmeren, P. (2012) Why Are Convertible Bond Announcements Associated with Increasingly Negative Issuer Stock Returns? An Arbitrage-Based Explanation. Journal of Banking & Finance, 36, 2884-2899. https://doi.org/10.1016/j.jbankfin.2012.03.019
- De Jong, A., Dutordoir, M. and Verwijmeren, P. (2011) Why Do Convertible Issuers Simultaneously Repurchase Stock? An Arbitrage-Based Explanation. Journal of Financial Economics, 100, 113-129. https://doi.org/10.1016/j.jfineco.2010.10.016
- Choi, D., Getmansky, M. and Tookes, H. (2009) Convertible Bond Arbitrage, Liquidity Externalities, and Stock Prices. Journal of Financial Economics, 91, 227-251.
- Fabozzi, F.J., Liu, J. and Switzer, L.N. (2009) Market Efficiency and Returns from Convertible Bond Hedging and Arbitrage Strategies. Journal of Alternative Investments, 11, 37-64. https://doi.org/10.3905/JAI.2009.11.3.037
- Shkilko, A., Van Ness, B. and Van Ness, R. (2009) Aggressive Short Selling and Price Reversals. Shorting Share of Trades. (Unpublished Manuscript)
- Lynch, A.W. and Mendenhall, R.R. (1997) New Evidence on Stock Price Effects Associated with Changes in the S&P 500 Index. Journal of Business, 70, No. 3. https://doi.org/10.1086/209722
- Dhillon, U. and Johnson, H. (1991) Changes in the Standard and Poor’s 500 List. The Journal of Business, 64, 75-85. https://doi.org/10.1086/296526
- Mazzeo, M.A. and Moore, W.T. (1992) Liquidity Costs and Stock Price Response to Convertible Security Calls. The Journal of Business, 65, 353. https://doi.org/10.1086/296575
- Shleifer, A. (1986) Do Demand Curves for Stocks Slope Down? The Journal of Finance, 41, 579-590. https://doi.org/10.1111/j.1540-6261.1986.tb04518.x
- Stulz, R.M. (2007) Hedge Funds: Past, Present, and Future. The Journal of Economic Perspectives, 21, 175-194. https://doi.org/10.1257/jep.21.2.175
- Kondor, P. (2009) Risk in Dynamic Arbitrage: The Price Effects of Convergence Trading. The Journal of Finance, 64, 631-655. https://doi.org/10.1111/j.1540-6261.2009.01445.x
- Christophe, S.E., Ferri, M.G. and Hsieh, J. (2010) Informed Trading before Analyst Downgrades: Evidence from Short Sellers. Journal of Financial Economics, 95, 85-106. https://doi.org/10.1016/j.jfineco.2009.02.004
- Diether, K.B., Lee, K.H. and Werner, I.M. (2009) Short-Sale Strategies and Return Predictability. Review of Financial Studies, 22, 575-607. https://doi.org/10.1093/rfs/hhn047