Intermediary frictions and convertible bond pricing

Bruce D. Grundy, Patrick Verwijmeren and Antti Yang

Journal of Financial Intermediation, 2024, vol. 58, issue C

Abstract: Buy-and-hedge intermediaries are important investors in the convertible bond market as they intermediate between firms that require capital quickly and investors requiring time to assess the security. Their strategy requires them to manage the trade-offs involved with the costs and benefits of hedging. We find that prices of convertible securities reflect the costs that intermediaries incur when managing their positions. Especially cross-sectional and within-bond variation of intermediaries’ loan costs helps explain variation in convertible bond underpricing.

Keywords: Intermediary frictions; Convertible bond underpricing; Convertible arbitrage; Hedge funds; Short-selling costs (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinin:v:58:y:2024:i:c:s1042957324000135

DOI: 10.1016/j.jfi.2024.101085

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