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Simulating convertible bond arbitrage portfolios

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  • Mark Hutchinson
  • Liam Gallagher

Abstract

The recent growth in interest in convertible bond arbitrage (CBA) has predominantly come from the hedge fund industry. Past empirical evidence has shown that a CBA strategy generates positive monthly abnormal risk-adjusted returns. However, these studies have focused on hedge fund returns which exhibit instant history bias, selection bias, survivorship bias and smoothing. This article replicates the core underlying CBA strategy to generate an equally weighted and market capitalization daily CBA return series free of these biases, for the period 1990 through 2002. These daily series also capture important short-run price dynamics that previous studies have ignored.

Suggested Citation

  • Mark Hutchinson & Liam Gallagher, 2008. "Simulating convertible bond arbitrage portfolios," Applied Financial Economics, Taylor & Francis Journals, vol. 18(15), pages 1247-1262.
    • Handle: RePEc:taf:apfiec:v:18:y:2008:i:15:p:1247-1262
    DOI: 10.1080/09603100701604217
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    References listed on IDEAS

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    Cited by:

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    2. Akram, Q. Farooq & Rime, Dagfinn & Sarno, Lucio, 2009. "Does the law of one price hold in international financial markets? Evidence from tick data," Journal of Banking & Finance, Elsevier, vol. 33(10), pages 1741-1754, October.

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