آربیتراژ اوراق قرضه قابل تبدیل، اثرات جانبی نقدینگی و قیمت سهام
|کد مقاله||سال انتشار||تعداد صفحات مقاله انگلیسی||ترجمه فارسی|
|13606||2009||25 صفحه PDF||سفارش دهید|
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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of Financial Economics, Volume 91, Issue 2, February 2009, Pages 227–251
In the context of convertible bond issuance, we examine the impact of arbitrage activity on underlying equity markets. In particular, we use changes in equity short interest following convertible bond issuance to identify convertible bond arbitrage activity and analyze its impact on stock market liquidity and prices for the period 1993 to 2006. There is considerable evidence of arbitrage-induced short selling resulting from issuance. Moreover, we find strong evidence that this activity is systematically related to liquidity improvements in the stock. These results are robust to controlling for the potential endogeneity of arbitrage activity.
Does arbitrage activity impact market quality? Although this question is not new, the proliferation of hedge funds in recent years has brought increasing attention to important questions regarding their impact on both liquidity and market efficiency (see, e.g., Securities and Exchange Commission (SEC) Staff Report, 2003). In this paper, we focus on one particular strategy: convertible bond arbitrage. The growth in the issuance of the equity-linked debt securities can be attributed, at least in part, to the growing supply of capital provided by hedging strategies. Convertible bond issuance has increased more than sixfold in the past 15 years, from $7.8 billion in 1992 to $50.2 billion in 2006 (Securities Data Corporation (SDC), Global New Issues database). In fact, the widespread belief among Wall Street practitioners is that convertible bond arbitrage hedge funds purchase 70% to 80% of the convertible debt offered in primary markets.1 In order to clarify the intuition as to why convertible bond arbitrage might impact liquidity in underlying equity markets, it is useful to outline the basics of the strategy. The aim of convertible bond arbitrage is to exploit mispricing in convertible bonds, usually by buying an undervalued convertible bond (Henderson, 2005) and taking a short position in the equity.2 A typical convertible bond arbitrage strategy employs delta-neutral hedging, in which an arbitrageur buys the convertible bond and sells short the underlying equity at the current delta. There are two important components of the strategy (shown in Fig. 1). The first is the initial position, which is set up so that no profit or loss is generated from very small movements in the underlying stock price and where cash flows are captured from both the convertible bond's yield and the short position's interest rebate. The second is dynamic hedging activity that follows the initial short position. If the price of the stock increases, the arbitrageur adds to the short position because the delta has increased. Similarly, when the stock price declines, the arbitrageur buys stock to cover part of the short position due to the decrease in delta. Aggregate equity market trading demand, in contrast, is expected to move in the opposite direction. For example, Chordia, Roll, and Subrahmanyam (2002) show a positive correlation between stock returns and order imbalances. This means that the dynamic hedging activities of convertible bond arbitrageurs, a class of investors trading against net market demand, should improve liquidity. This potentially positive role for hedge funds and other convertible bond arbitrageurs is contrary to the view of a destabilizing role for arbitrageurs in markets (see Mayhew, 2000, for a survey of this literature). Although we do not have direct data on convertible bond arbitrage activity in individual stocks, we are able to identify firms and dates on which we know that initial arbitrage positions are taken: convertible bond issuance dates. We use these initial positions as a proxy for the presence of convertible bond arbitrageurs in the market for the stock (i.e., their future dynamic hedging). For the period 1993 to 2006, we calculate changes in short interest at issuance. Our approach is simple, yet it captures the strategy, as we observe large increases in short interest near convertible debt offerings. The methodology allows us to use aggregate data to identify the presence of a particular type of trader in equity markets. Our proxy for arbitrage activity (initial change in short interest of issuing firms) has several advantages over using hedge fund databases to estimate convertible bond arbitrage activity. First, this provides a measure of positions taken by arbitrageurs in individual securities. Fund flows data in hedge fund databases are self-reported and therefore provide an incomplete measure of convertible bond arbitrage activity. The databases only partially represent the hedge fund universe, with many large funds choosing not to participate. Second, there can be style misclassification and funds reporting multiple strategies to hedge fund databases. Third, even if we measured the assets of the funds perfectly, the positions would still be unobservable due to the use of leverage. We find considerable evidence of arbitrage activity (i.e., short selling in the stock at the date of bond issuance). We also find increased equity market liquidity following bond issuance. Moreover, these liquidity improvements are positively and significantly related to our proxy for convertible bond arbitrage activity. We also observe changes in stock return volatility. Following convertible debt issuance there is an average decrease in total return volatility as well as the idiosyncratic component of volatility. However, we do not find evidence of a systematic relationship between convertible bond arbitrage activity and these changes. We measure price efficiency using return autocorrelation and variance ratios (as in Lo and MacKinlay, 1988), to capture the extent to which stock prices follow a random walk. We do not observe significant changes in either of these measures following issuance. Taken together, we interpret the findings as evidence that convertible bond arbitrage activity tends to positively affect equity markets; however, this is primarily through liquidity improvements, not through stock prices. A critical aspect of the analysis is that we do not observe arbitrage activity directly. Instead, we infer it based on changes in short interest at bond issuance. We conduct several tests to examine the validity of this important assumption.3 First, we rule out the possibility that changes that we observe are due to changes in market-wide variables or to factors impacting firms with similar characteristics. We do this by conducting all analyses based on changes relative to a set of control firms (matched on industry, exchange, size, book-to-market, and turnover). Second, it could be that the short selling that we observe is due to valuation shorting resulting from news of the convertible bond issue, not due to classic convertible bond arbitrage. In order to address this issue, we hand-collect announcement dates for our sample of issues. The announcement and issue dates allow us to separate the impact of announcement period shorting versus issue period shorting, which we interpret as valuation shorting versus convertible bond arbitrage, respectively. In all of these tests, we find evidence consistent with the view that the short selling that we observe near convertible bond issues is due to convertible bond arbitrage. We also conduct robustness tests, in which we explicitly control for other potential sources of volume that can be associated with the convertible bond issue. In addition, we control for potential endogeneity of arbitrage activity and find similar results. The main contribution of this paper is that we identify arbitrage activity and are able to estimate its impact on market quality (we use changes in equity market liquidity and price efficiency as measures of quality). By identifying a particular trader type, our methodology allows us to shed additional light on the mechanisms through which quality changes following issuance occur. The primary findings suggest that changes in liquidity vary systematically with the positions taken by arbitrageurs. The findings in this paper may be of interest to managers of issuing firms concerned about liquidity and efficiency spillovers in their stock as a result of their capital structure decisions. This paper is organized as follows. Section 2 contains a brief review of related literature. Section 3 constructs the main hypotheses. Section 4 describes the data and sample. Section 5 presents the analysis of arbitrage activity, liquidity, and prices. Several robustness checks are also presented. Finally, Section 6 concludes.
نتیجه گیری انگلیسی
In this paper, we investigate the link between convertible bond arbitrage, liquidity, and stock prices with the goal of improving our understanding of the impact of arbitrageurs on market quality, measured by stock liquidity and efficiency. A typical convertible bond arbitrage strategy employs delta-neutral hedging in which an arbitrageur buys the convertible bond and sells the underlying equity at a specific delta. If the price of the stock increases, to keep the same delta hedge, the arbitrageur sells the stock. When the stock price decreases, the arbitrageur buys back the stock. Because aggregate trading demand tends to move in the opposite direction of this convertible bond arbitrage activity, arbitrageurs are expected to improve liquidity in the stock. We examine changes in short interest near an event in which the convertible bond arbitrage strategy is widely used (bond issuance date), and are able to use aggregate data to estimate the equity positions taken by convertible bond arbitrageurs. Specifically, we examine the sensitivity of subsequent changes in liquidity and stock price-efficiency measures to this proxy for convertible bond arbitrage activity. We add to findings in previous studies that show average changes in equity market quality when new securities are introduced in that we are able to examine cross-sectional implications of the introduction of a particular trader type. This helps to shed additional empirical light on the issue of how the introduction of new securities that are used by arbitrageurs can impact overall market quality. We show improvements in liquidity following issuance of convertible debt. More important, we find that the increase in liquidity is systematically related to our proxy for convertible bond arbitrage activity. This suggests positive liquidity spillovers due to the arbitrage activity in equity markets. We do not find evidence of a systematic relationship between arbitrage activity and stock return volatility and efficiency; however, we do find evidence of average changes in volatility measures near bond issuance. We perform a variety of robustness checks, including controlling for the potential endogeneity of convertible bond arbitrage activity as well as other potential sources of volume. We find similar results.