|Appears in Collections:||Accounting and Finance Journal Articles|
|Peer Review Status:||Refereed|
|Title:||The rise and demise of the convertible arbitrage strategy|
ter, Horst Jenke
|Citation:||Loncarski I, ter Horst J & Veld C (2009) The rise and demise of the convertible arbitrage strategy, Financial Analysts Journal, 65 (5), pp. 35-50.|
|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. The authors find that convertible bonds are underpriced at the issuance dates; at the same time, short sales of underlying equity increase significantly. Both effects are stronger and more persistent for equity-like convertibles than for debtlike convertibles. Furthermore, short-sale pressures negatively affect stock returns around the announcement and issuance dates of convertibles. All these factors have likely contributed to the shift towards issuing more debtlike convertibles in recent years, which, in turn, has substantially lowered the returns from convertible arbitrage.|
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