Convertible Debt Arbitrage Crashes Revisited

Craig Lewis; Ben Munyan; Patrick Verwijmeren

doi:10.1017/s0022109023000583

Convertible Debt Arbitrage Crashes Revisited

Craig Lewis
, Ben Munyan
, Patrick Verwijmeren

Business Economics

Vanderbilt University
Federal Reserve Bank

Research output: Contribution to journal › Article › Academic › peer-review

1 Citation (Scopus)

216 Downloads (Pure)

Abstract

This article examines the severity of the 2008 arbitrage crash in the convertible bond market by estimating how expensive it would have been to liquidate portfolio securities immediately. We consider whether funds actually demanded immediate liquidity or were able to delay trades. Our results indicate that the cost of immediacy was high, but that convertible bond sellers could largely avoid selling at fire sale prices. These results can be explained by dealers recognizing when trades are liquidity-motivated rather than information-based and by a shift to riskless principal trading, allowing dealers to avoid taking bonds into inventory.

Original language	English
Pages (from-to)	1926-1962
Number of pages	37
Journal	Journal of Financial and Quantitative Analysis
Volume	59
Issue number	4
DOIs	https://doi.org/10.1017/s0022109023000583
Publication status	Published - 1 Jun 2024

Bibliographical note

Publisher Copyright:
© The Author(s), 2023.

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convertible-debt-arbitrage-crashes-revisitedAccepted author manuscript, 572 KBLicence: Article 25fa Dutch Copyright Act

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Convertible Debt Arbitrage Crashes Revisited

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