RT Journal Article
SR Electronic
T1 A Liquidity-Based Explanation of Convertible Arbitrage Alphas
JF The Journal of Fixed Income
FD Institutional Investor Journals
SP 28
OP 43
DO 10.3905/jfi.2010.20.1.028
VO 20
IS 1
A1 George Batta
A1 George Chacko
A1 Bala G. Dharan
YR 2010
UL https://pm-research.com/content/20/1/28.abstract
AB The authors examine the extent to which excess returns from convertible arbitrage represent positive returns to managers from exploiting pricing inefficiencies versus compensation for exposure to systematic risk factors. Initial empirical tests show that when liquidity risk is excluded as a factor, a good portion of abnormal returns to convertible bond strategies appears to be driven both by overpricing of the underlying equity and apparent underpricing of convertible bonds. However, when the effects of liquidity are included, abnormal returns to convertible bond arbitrage essentially disappear and only remain localized in convertible debt trading closer to the issuance date.TOPICS: Fixed-income portfolio management, factor-based models, VAR and use of alternative risk measures of trading risk