Arbitrage Crashes: Slow-Moving Capital or Market Segmentation?

68 Pages Posted: 6 Dec 2013 Last revised: 3 Jun 2020

See all articles by Jens Dick-Nielsen

Jens Dick-Nielsen

Copenhagen Business School - Department of Finance

Marco Rossi

Texas A&M

Date Written: June 2, 2020

Abstract

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

Dick-Nielsen, Jens and Rossi, Marco, Arbitrage Crashes: Slow-Moving Capital or Market Segmentation? (June 2, 2020). Available at SSRN: https://ssrn.com/abstract=2364362 or http://dx.doi.org/10.2139/ssrn.2364362

Jens Dick-Nielsen (Contact Author)

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

Marco Rossi

Texas A&M ( email )

360S Wehner
College Station, TX 77843-4218
United States

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