Arbitrage Crashes: Slow-Moving Capital or Market Segmentation?

Jens Dick-Nielsen

Copenhagen Business School - Department of Finance

Marco Rossi

Texas A&M

November 13, 2015

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 past arbitrage crashes in the convertible bond market. Even when convertible bonds were severely underpriced, some investors continued to buy strictly dominated straight bonds from the same issuers. Our findings suggest that both market segmentation and slow-moving capital obstructed the recovery from the arbitrage crashes. Furthermore, exploiting the market segmentation with a long/short trading strategy provides positive abnormal returns after accounting for transaction costs.

Number of Pages in PDF File: 78

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

JEL Classification: G01, G12, G13

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Date posted: December 6, 2013 ; Last revised: November 14, 2015

Suggested Citation

Dick-Nielsen, Jens and Rossi, Marco, Arbitrage Crashes: Slow-Moving Capital or Market Segmentation? (November 13, 2015). Available at SSRN: https://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
Marco Rossi
Texas A&M ( email )
360S Wehner
College Station, TX 77843-4218
United States

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