PT - JOURNAL ARTICLE AU - George Batta AU - George Chacko AU - Bala G. Dharan TI - A Liquidity-Based Explanation of Convertible Arbitrage Alphas AID - 10.3905/jfi.2010.20.1.028 DP - 2010 Jun 30 TA - The Journal of Fixed Income PG - 28--43 VI - 20 IP - 1 4099 - https://pm-research.com/content/20/1/28.short 4100 - https://pm-research.com/content/20/1/28.full AB - The authors examine the extent to which excess returns from convertible arbitrage represent positive returns to managers from exploiting pricing inefficiencies versus compensation for exposure to systematic risk factors. Initial empirical tests show that when liquidity risk is excluded as a factor, a good portion of abnormal returns to convertible bond strategies appears to be driven both by overpricing of the underlying equity and apparent underpricing of convertible bonds. However, when the effects of liquidity are included, abnormal returns to convertible bond arbitrage essentially disappear and only remain localized in convertible debt trading closer to the issuance date.TOPICS: Fixed-income portfolio management, factor-based models, VAR and use of alternative risk measures of trading risk