The rise and demise of the convertible arbitrage strategy

I. Loncarski, J.R. Ter Horst, C.H. Veld

Research output: Contribution to journalArticleScientificpeer-review

Abstract

This article 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 toward issuing more debtlike convertibles in recent years, which, in turn, has substantially lowered the returns from convertible arbitrage.
Original languageEnglish
Pages (from-to)35-50
JournalFinancial Analysts Journal
Volume65
Issue number5
Publication statusPublished - 2009

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Arbitrage
Equity
Short sales
Convertible bonds
Announcement
Assets
Stock returns
Underpricing
Factors
Hedge funds

Cite this

Loncarski, I., Ter Horst, J. R., & Veld, C. H. (2009). The rise and demise of the convertible arbitrage strategy. Financial Analysts Journal, 65(5), 35-50.
Loncarski, I. ; Ter Horst, J.R. ; Veld, C.H. / The rise and demise of the convertible arbitrage strategy. In: Financial Analysts Journal. 2009 ; Vol. 65, No. 5. pp. 35-50.
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Loncarski, I, Ter Horst, JR & Veld, CH 2009, 'The rise and demise of the convertible arbitrage strategy', Financial Analysts Journal, vol. 65, no. 5, pp. 35-50.

The rise and demise of the convertible arbitrage strategy. / Loncarski, I.; Ter Horst, J.R.; Veld, C.H.

In: Financial Analysts Journal, Vol. 65, No. 5, 2009, p. 35-50.

Research output: Contribution to journalArticleScientificpeer-review

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Loncarski I, Ter Horst JR, Veld CH. The rise and demise of the convertible arbitrage strategy. Financial Analysts Journal. 2009;65(5):35-50.