Loncarski, I., ter Horst, J. and Veld, C. (2009) The rise and demise of the convertible arbitrage strategy. Financial Analysts Journal, 65(5), pp. 35-50. (doi: 10.2469/faj.v65.n5.1)
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Abstract
This paper analyzes convertible arbitrage, one of the most successful hedge fund strategies. The aim of the strategy is to exploit underpricing of convertible bonds by taking a long position in a convertible and a short position in the underlying asset. We find that convertible bonds are underpriced at the issuance dates. At the same time, short sales of underlying equity significantly increase. Both effects are stronger and more persistent for equity-like than for debt-like convertibles. Furthermore, we find that short sales pressures negatively affect stock returns around announcement and issuance dates of convertibles. In our opinion, this contributed to the shift towards issuing more debt-like convertibles in recent years, which in turn substantially lowered the returns from convertible arbitrage.
| Item Type: | Articles |
|---|---|
| Status: | Published |
| Refereed: | Yes |
| Glasgow Author(s) Enlighten ID: | Veld, Professor Chris |
| Authors: | Loncarski, I., ter Horst, J., and Veld, C. |
| College/School: | College of Social Sciences > Adam Smith Business School > Accounting and Finance |
| Journal Name: | Financial Analysts Journal |
| ISSN: | 0015-198X |
| ISSN (Online): | 1938-3312 |
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