Profitable Price Impact: The Case of Convertible Bond Arbitrage

51 Pages Posted: 30 Jul 2019 Last revised: 13 Feb 2020

See all articles by Milad Nozari

Milad Nozari

Yale School of Management - International Center for Finance

Michael Pascutti

Yale University; Department of Economics

Heather Tookes

Yale University - Yale School of Management; Yale University - International Center for Finance

Date Written: February 11, 2020

Abstract

We investigate a potential source of profit to convertible bond arbitrageurs that is new to the literature: anticipatory hedging in advance of convertible bond issues. When the reference stock price in a bond contract is determined after a new issue is announced, anticipatory short selling in the underlying stock can result in “profitable price impact” (PPI). Downward stock price pressure prior to bond pricing creates an abnormally cheap embedded call option. Consistent with PPI, we document issuer stock price declines on bond pricing days that are more concentrated during the last hour of trading and are followed by partial adjustments.

Keywords: convertible bond arbitrage, prehedging

JEL Classification: G14, G32

Suggested Citation

Nozari, Milad and Pascutti, Michael and Tookes, Heather, Profitable Price Impact: The Case of Convertible Bond Arbitrage (February 11, 2020). Available at SSRN: https://ssrn.com/abstract=3426914 or http://dx.doi.org/10.2139/ssrn.3426914

Milad Nozari

Yale School of Management - International Center for Finance ( email )

Michael Pascutti

Yale University ( email )

New Haven, CT 06520
United States

Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States

Heather Tookes (Contact Author)

Yale University - Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

Yale University - International Center for Finance ( email )

Box 208200
New Haven, CT 06520
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
99
Abstract Views
501
rank
280,157
PlumX Metrics