Download or read book Convertible Bond Arbitrage, Liquidity Externalities and Stock Prices written by Darwin Choi and published by . This book was released on 2010 with total page 58 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.