Arbitrage Crashes: Slow-Moving Capital or Market Segmentation?
68 Pages Posted: 6 Dec 2013 Last revised: 3 Jun 2020
Date Written: June 2, 2020
Slow-moving capital cannot fully explain the 2005 and 2008 arbitrage crashes in the
convertible bond market. Faced with depressed convertible bond prices implying negative option values, some investors continued to buy strictly dominated straight bonds from the same issuers. This finding suggests that both market segmentation and slow-moving capital obstructed the recovery from these persistent crashes. Evidence based on trading and institutional holdings shows that insurance companies did not take advantage of convertibles’ depressed prices despite having a natural demand for their promised cash flows. Narrow investment mandates thus create non-trivial segmentation within the corporate bond market.
Keywords: Convertible bonds, arbitrage crashes, market segmentation, slow moving capital, investment mandates
JEL Classification: G01, G12, G13
Suggested Citation: Suggested Citation