Does Convertible Arbitrage Risk Exposure Vary Through Time?

We model the returns of the convertible arbitrage strategy using a non-linear framework. This strategy has generated long periods of positive returns and low volatility, followed by shorter periods of extreme negative returns and high volatility, associated with market upheaval. We specify a smooth transition regression model to assess performance, a class of model particularly suited to this type of strategy as it allows gradual transition between risk regimes. We show that in alternate regimes, the strategy exhibits relatively high (low) exposure to risk factors and alpha is high (low). The evidence reported can account for abnormal returns demonstrated in previous studies.

MARKET COMPETITION, ARBITRAGE RISK, AND CAPITAL STRUCTURE: EVIDENCE FROM TAIWAN

The purpose of this paper is to understand how the product market competition and the arbitrage risk affects managers’ decisions on capital structure. To find managers’ risk preference, we introduce the interaction between market competition and the arbitrage risk of the firm. Sampling from Taiwanese listed companies from 1986 to 2011, we identify both the market competition and the arbitrage risk affects managers’ debt decisions. In addition, we find that most managers in monopolistic firms increase debt to decrease the agency costs. However, some hold risk-averse motivation to enjoy their “quiet life”. These “quiet life” managers exist in those companies that are in non-competitive markets and that exists large idiosyncratic risk.