Convertible Bond Arbitrage, Liquidity Externalities and Stock Prices
58 Pages Posted: 24 May 2006 Last revised: 13 Aug 2010
Date Written: February 27, 2008
In the context of convertible bond issuance, we examine the impact of arbitrage activity on underlying equity markets. In particular, we use changes in equity short interest following convertible bond issuance to identify convertible bond arbitrage activity and analyze its impact on stock market liquidity and prices for the period 1993 to 2006. There is considerable evidence of arbitrage-induced short selling resulting from issuance. Moreover, we find strong evidence that this activity is systematically related to liquidity improvements in the stock. These results are robust to controlling for the potential endogeneity of arbitrage activity.
Keywords: Convertible Bond Arbitrage, Liquidity, Spillovers
JEL Classification: G12, G14, G10, G32
Suggested Citation: Suggested Citation