78 Pages Posted: 6 Dec 2013 Last revised: 14 Nov 2015
Date Written: 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.
Keywords: Convertible bonds, arbitrage crashes, market segmentation, slow moving capital
JEL Classification: G01, G12, G13
Suggested Citation: 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