Werner Short Selling Activities and Convertible Bond Arbitrage

Empirical Evidence from the New York Stock Exchange
2010
ISBN: 978-3-8349-6003-0
Verlag: Betriebswirtschaftlicher Verlag Gabler
Format: PDF
Kopierschutz: 1 - PDF Watermark

E-Book, Englisch, Band 75, 256 Seiten, eBook

Reihe: ebs-Forschung, Schriftenreihe der EUROPEAN BUSINESS SCHOOL Schloß Reichartshausen

Sebastian Werner examines aggregate short sales and convertible bond arbitrage, which is a typical hedge fund strategy that involves a significant short position in the underlying stock of a long convertible bond position for hedging purposes. He provides insightful and new observations of the significant difference in the trading pattern, information content and resulting impact on stock returns of arbitrage- versus valuation-based short selling activities.


Sebastian P. Werner earned his doctoral degree from the European Business School under the supervision of Prof. Dr. Lutz Johanning and now works in equity portfolio management for a global bank based in Frankfurt.

Zielgruppe

Research

Autoren/Hrsg.

Werner, Sebastian P.

Inhaltsverzeichnis

1;Foreword;6
2;Acknowledgements;7
3;Overview;9
4;Table of Contents;10
5;List of Tables;14
6;List of Figures;16
7;List of Abbreviations;17
8;1 Introduction;19
8.1;1.1 Background and Objective;19
8.2;1.2 Organization of the Dissertation;20
9;2 Background and Empirical Predictions;24
9.1;2.1 Short Selling;24
9.1.1;2.1.1 Foundations;24
9.1.1.1;2.1.1.1 General Mechanics and Institutional Details of Short Sales in U.S. Equity Markets;24
9.1.1.2;2.1.1.2 A Change to U.S. Short Selling Regulation – Regulation SHO;28
9.1.1.3;2.1.1.3 Motives for Short Selling Activities;31
9.1.1.4;2.1.1.4 Market Development of Short Sales in Recent Years;32
9.1.2;2.1.2 Literature Review on Short Selling;34
9.1.2.1;2.1.2.1 Theoretical Work;34
9.1.2.2;2.1.2.2 Empirical Evidence;35
9.1.2.2.1;2.1.2.2.1 Information Content of Short Sales;35
9.1.2.2.2;2.1.2.2.2 Arbitrage-Based Short Selling;38
9.1.3;2.1.3 Determinants of Short Selling;40
9.1.3.1;2.1.3.1 Valuation;40
9.1.3.2;2.1.3.2 Arbitrage and Hedging;41
9.1.3.3;2.1.3.3 Short Sale Constraints;43
9.1.4;2.1.4 Summary;44
9.2;2.2 Convertible Bond Arbitrage;46
9.2.1;2.2.1 Convertible Bonds;47
9.2.1.1;2.2.1.1 Theoretical Foundations and Terminology;47
9.2.1.2;2.2.1.2 Delta and Gamma;51
9.2.2;2.2.2 The Convertible Bond Arbitrage Strategy;54
9.2.3;2.2.3 Historical Performance and Market Activity;59
9.2.4;2.2.4 Literature Review on Convertible Bond Arbitrage and Short Selling Activity;61
9.2.5;2.2.5 Summary;62
9.3;2.3 Empirical Predictions;62
9.3.1;2.3.1 Research Objective and Propositions;63
9.3.2;2.3.2 Difference in Trading Pattern;64
9.3.3;2.3.3 Difference in Information Content and Impact on Stock Returns;65
10;3 The Event Study Methodology;69
10.1;3.1 Relevance of the Methodology for the Empirical Investigation;69
10.2;3.2 Outline of an Event Study;70
10.3;3.3 Estimation of Abnormal Returns;72
10.3.1;3.3.1 Overview;72
10.3.2;3.3.2 Market Model Approach;72
10.3.3;3.3.3 Market Adjusted Return Model Approach;73
10.3.4;3.3.4 Time-Series and Cross-Sectional Aggregation;74
10.4;3.4 Estimation of Abnormal Short Selling Activity;75
10.4.1;3.4.1 Overview;75
10.4.2;3.4.2 Mean Adjusted Approach;76
10.4.3;3.4.3 Market Model Approach;77
10.4.4;3.4.4 Time-Series and Cross-Sectional Aggregation;78
10.5;3.5 Hypotheses Testing;79
10.5.1;3.5.1 Tests of Equality;80
10.5.2;3.5.2 Single Hypotheses Tests;81
10.6;3.6 Summary;82
11;4 Data, Full Sample and Variable Construction;83
11.1;4.1 Data Sources;83
11.1.1;4.1.1 Daily Short Sale Transaction Data;83
11.1.2;4.1.2 Convertible Bond Data;85
11.1.3;4.1.3 Stock, Firm, and Accounting Data;85
11.2;4.2 Full Sample Construction;86
11.3;4.3 Variable Construction;87
11.3.1;4.3.1 Firm and Stock Characteristics;87
11.3.2;4.3.2 Trading Activity Variables;89
11.3.3;4.3.3 Dummy Variables;90
11.3.4;4.3.4 Convertible Bond Variables;91
11.4;4.4 Summary;92
12;5 Difference in Abnormal Short Selling Activity Following Events of Large Positive Stock Price Changes;94
12.1;5.1 Measuring the Difference in Abnormal Short Selling Activity;94
12.1.1;5.1.1 Methodology and Set-up;95
12.1.1.1;5.1.1.1 Event Determination and Sample Construction;95
12.1.1.2;5.1.1.2 Measuring Post-Event Abnormal Short Selling Activity;97
12.1.1.3;5.1.1.3 Measuring Differences between Event Observation Sub-Samples;98
12.1.1.4;5.1.1.4 Building Delta Splits;99
12.1.2;5.1.2 Descriptives;100
12.1.2.1;5.1.2.1 Total Event Sample and Sub-Sample Characteristics;100
12.1.2.2;5.1.2.2 Delta Split Characteristics;103
12.1.3;5.1.3 Event Study Results;109
12.1.3.1;5.1.3.1 Total Event Sample Results;109
12.1.3.2;5.1.3.2 Delta Split Results;112
12.1.3.3;5.1.3.3 Robustness Tests;122
12.1.4;5.1.4 Summary;123
12.2;5.2 Investigating Abnormal Short Selling Activity;124
12.2.1;5.2.1 Cross-Sectional Analyses;124
12.2.1.1;5.2.1.1 Set-up and Regression Framework;124
12.2.1.2;5.2.1.2 Results;137
12.2.2;5.2.2 Role of Convertible Bond Arbitrage in Abnormal Short Selling Activity;140
12.2.2.1;5.2.2.1 Set-up and Regression Framework;140
12.2.2.2;5.2.2.2 Results;142
12.2.3;5.2.3 Impact of Abnormal Short Selling Activity on Stock Returns;142
12.2.3.1;5.2.3.1 Estimating Abnormal Returns;143
12.2.3.2;5.2.3.2 Relationship between Abnormal Returns and Short Selling Activity;151
12.2.4;5.2.4 Summary;157
12.3;5.3 Conclusion;158
13;6 Difference in Information Content of Extreme Short Selling Activity Events and the Impact on Stock Returns;160
13.1;6.1 Measuring the Difference in Information Content;160
13.1.1;6.1.1 Methodology and Set-up;161
13.1.1.1;6.1.1.1 Event Determination and Sample Construction;161
13.1.1.2;6.1.1.2 Measuring Post-Event Abnormal Returns;163
13.1.1.3;6.1.1.3 Measuring Differences between Event Observation Sub-Samples and Building Delta Splits;164
13.1.2;6.1.2 Descriptives;165
13.1.2.1;6.1.2.1 Total Event Sample and Sub-Sample Characteristics;165
13.1.2.2;6.1.2.2 Delta Split Characteristics;168
13.1.3;6.1.3 Event Study Results;175
13.1.3.1;6.1.3.1 Total Event Sample Results;175
13.1.3.2;6.1.3.2 Delta Split Results;178
13.1.3.3;6.1.3.3 Robustness Tests;187
13.1.4;6.1.4 Summary;189
13.2;6.2 Investigating the Impact on Stock Returns;190
13.2.1;6.2.1 Stock Return Recovery Test;190
13.2.2;6.2.2 Short Selling Activity and the Temporary Price Pressure Effect;192
13.2.2.1;6.2.2.1 Estimating Abnormal Short Selling Activity;193
13.2.2.2;6.2.2.2 Relationship between Abnormal Returns and Short Selling Activity;201
13.2.2.3;6.2.2.3 Testing for Short-Selling Induced Temporary Price Pressure;207
13.2.3;6.2.3 Summary;209
13.3;6.3 Conclusion;210
14;7 Overall Conclusion;212
15;Appendix;215
16;References;258

Background and Empirical Predictions.- The Event Study Methodology.- Data, Full Sample and Variable Construction.- Difference in Abnormal Short Selling Activity Following Events of Large Positive Stock Price Changes.- Difference in Information Content of Extreme Short Selling Activity Events and the Impact on Stock Returns.- Overall Conclusion.

Über Autor(innen)

Sebastian P. Werner earned his doctoral degree from the European Business School under the supervision of Prof. Dr. Lutz Johanning and now works in equity portfolio management for a global bank based in Frankfurt.