Abstract

http://ssrn.com/abstract=2364362
 


 



Arbitrage Crashes: Slow-Moving Capital or Market Segmentation?


Jens Dick-Nielsen


Copenhagen Business School - Department of Finance

Marco Rossi


University of Notre Dame - Department of Finance

December 6, 2013


Abstract:     
The predominant explanation for arbitrage crashes is a lack of investor capital to exploit mispricing. This paper shows that slow moving capital is only partially responsible for the 2005 and 2008 arbitrage crashes in the convertible bond market. Even when convertible bonds where underpriced, investors were still buying strictly dominated straight bonds from the same issuers. This finding suggests that market segmentation exaggerated the convertible arbitrage crashes. Furthermore, it is possible to exploit the market segmentation with a long/short trading strategy providing positive abnormal returns. The strategy is profitable even after accounting for transaction cost.

Number of Pages in PDF File: 51

Keywords: Convertible bonds, arbitrage crashes, market segmentation, slow moving capital

JEL Classification: G01, G12, G13

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Date posted: December 6, 2013  

Suggested Citation

Dick-Nielsen, Jens and Rossi, Marco, Arbitrage Crashes: Slow-Moving Capital or Market Segmentation? (December 6, 2013). Available at SSRN: http://ssrn.com/abstract=2364362 or http://dx.doi.org/10.2139/ssrn.2364362

Contact Information

Jens Dick-Nielsen (Contact Author)
Copenhagen Business School - Department of Finance ( email )
Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark
Marco Rossi
University of Notre Dame - Department of Finance ( email )
P.O. Box 399
Notre Dame, IN 46556-0399
United States
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