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Convertible Bond Arbitrage, Liquidity Externalities and Stock Prices
Darwin Choi Hong Kong University of Science & Technology (HKUST) - Department of Finance Mila Getmansky University of Massachusetts at Amherst - Department of Finance & Operations Management Heather Tookes Yale School of Management Journal of Financial Economics, Vol. 91, No. 2, pp. 227-251, February 2009 Yale ICF Working Paper No. 08-09 Abstract: In the context of convertible bond issuance, we examine the impact of arbitrage activity on underlying equity markets. In particular, we use changes in equity short interest following convertible bond issuance to identify convertible bond arbitrage activity and analyze its impact on stock market liquidity and prices for the period 1993 to 2006. There is considerable evidence of arbitrage-induced short selling resulting from issuance. Moreover, we find strong evidence that this activity is systematically related to liquidity improvements in the stock. These results are robust to controlling for the potential endogeneity of arbitrage activity.
Keywords: Convertible Bond Arbitrage, Liquidity, Spillovers JEL Classifications: G12, G14, G10, G32 Accepted Paper SeriesDate posted: May 24, 2006 ; Last revised: November 18, 2009Suggested CitationContact Information
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