Market Efficiency and Returns from Convertible Bond Hedging and Arbitrage Strategies

Posted: 22 May 2019

See all articles by Frank J. Fabozzi

Frank J. Fabozzi

EDHEC Business School

Jinlin Liu

Concordia University, Quebec - John Molson School of Business

Lorne N. Switzer

Concordia University, Quebec - Department of Finance

Date Written: Winter 2009

Abstract

in this article, we examine a large set of trading strategies related to CBs to test for abnormal returns for several trading strategies, including various approaches for testing other forms of fixed income arbitrage. As a first step, we examine the naked long position of CBs/underlying stocks and the sensitivity of convertible returns to various risk factors. Second, we test for efficiency based on deviations from the 'law of one price' using relative returns of different combinations of long CBs with short positions in underlying stocks, which include equal money positions, delta-neutral positions, and bearish/bullish gamma positions. We also study the robustness of the various trading strategies to transaction costs, leverage effects, and alternative parameter inputs.

Keywords: convertible arbitrage, market efficiency, law of one price

Suggested Citation

Fabozzi, Frank J. and Liu, Jinlin and Switzer, Lorne N., Market Efficiency and Returns from Convertible Bond Hedging and Arbitrage Strategies (Winter 2009). Journal of Alternative Investments, Vol. 11, No. 3, 2009. Available at SSRN: https://ssrn.com/abstract=1937441

Frank J. Fabozzi

EDHEC Business School ( email )

France
215 598-8924 (Phone)

Jinlin Liu

Concordia University, Quebec - John Molson School of Business ( email )

1455 de Maisonneuve Blvd. W.
Montreal, Quebec H3G 1M8
Canada

Lorne N. Switzer (Contact Author)

Concordia University, Quebec - Department of Finance ( email )

John Molson School of Business
Montreal, Quebec H3G1M8
Canada
514-848-2424, x2960 (Phone)
514-848-4500 (Fax)

Register to save articles to
your library

Register

Paper statistics

Abstract Views
1,166
PlumX Metrics