Hedge Funds as International Liquidity Providers: Evidence from Convertible Bond Arbitrage in Canada

Financial Markets and Portfolio Management 31(2), 117–136, 2017

Posted: 2 Mar 2020

See all articles by Evan Gatev

Evan Gatev

Simon Fraser University

Mingxin Li

Canada Mortgage and Housing Corporation

Date Written: December 1, 2016

Abstract

We examine the impact of Canadian convertible bond issuance on equity market liquidity. Using issuance event dates between April 2002 and March 2011, we analyze the change in short interest and stock liquidity during a 1-year event window. We consider mainstream liquidity measures, including turnover, dollar volume, dollar spread, percentage spread, and the ratio of daily absolute stock return to dollar volume. We find that after convertible bond issuances, there are significant increases in short interest, but minimal overall improvements in liquidity. The change in liquidity is not significantly related to the change in short interest, except for the firms with large change in short interest. Interpreting increased short interest after issuance as a proxy for convertible bond arbitrage activity, the results suggest that there is limited positive liquidity externality of hedge fund activity in Canada.

Keywords: Stock liquidity, Short interest, Convertible bond arbitrage

JEL Classification: G12, G14, G15

Suggested Citation

Gatev, Evan and Li, Mingxin, Hedge Funds as International Liquidity Providers: Evidence from Convertible Bond Arbitrage in Canada (December 1, 2016). Financial Markets and Portfolio Management 31(2), 117–136, 2017, Available at SSRN: https://ssrn.com/abstract=3530137

Evan Gatev

Simon Fraser University ( email )

Burnaby, British Columbia V5A 1S6
Canada

Mingxin Li (Contact Author)

Canada Mortgage and Housing Corporation ( email )

700 Montreal Rd
Ottawa, Ontario K1A 0P7
Canada

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