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Hedge funds as international liquidity providers: evidence from convertible bond arbitrage in Canada

Author

Listed:
  • Evan Gatev

    (Simon Fraser University)

  • Mingxin Li

    (Simon Fraser University)

Abstract

We examine the impact of Canadian convertible bond issuance on equity market liquidity. Using issuance event dates between April 2002 and March 2011, we analyze the change in short interest and stock liquidity during a 1-year event window. We consider mainstream liquidity measures, including turnover, dollar volume, dollar spread, percentage spread, and the ratio of daily absolute stock return to dollar volume. We find that after convertible bond issuances, there are significant increases in short interest, but minimal overall improvements in liquidity. The change in liquidity is not significantly related to the change in short interest, except for the firms with large change in short interest. Interpreting increased short interest after issuance as a proxy for convertible bond arbitrage activity, the results suggest that there is limited positive liquidity externality of hedge fund activity in Canada.

Suggested Citation

  • Evan Gatev & Mingxin Li, 2017. "Hedge funds as international liquidity providers: evidence from convertible bond arbitrage in Canada," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 31(2), pages 117-136, May.
    • Handle: RePEc:kap:fmktpm:v:31:y:2017:i:2:d:10.1007_s11408-017-0285-0
    DOI: 10.1007/s11408-017-0285-0
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    References listed on IDEAS

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    More about this item

    Keywords

    Stock liquidity; Short interest; Convertible bond arbitrage;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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