Hostname: page-component-76fb5796d-25wd4 Total loading time: 0 Render date: 2024-04-29T07:00:35.363Z Has data issue: false hasContentIssue false
  • English
  • Français

Price Adjustment Delays and Arbitrage Costs: Evidence from the Behavior of Convertible Preferred Prices

Published online by Cambridge University Press:  06 April 2009

Ji-Chai Lin  and
Michael S. Rozeff
Ji-Chai Lin
Affiliation:
Department of Finance, Louisiana State University, Baton Rouge, LA 70803
Michael S. Rozeff
Affiliation:
School of Management, SUNY at Buffalo, Buffalo, New York 14260
Get access Rights & Permissions [Opens in a new window]

Abstract

Price adjustment delays occur between in-the-money convertible preferred stock prices and common stock prices. Convertible preferred prices systematically deviate from the prices predicted from their conversion relations with common stocks. The price predictability stems from price changes in the underlying common stocks leading the price changes in the convertible preferred stocks by up to nine hours. Cross-sectionally, about 70 percent of the variation in the unsigned size of the price deviations is explained by proxies for costs of arbitrage.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 30 , Issue 1 , March 1995 , pp. 61 - 80
Copyright
Copyright © School of Business Administration, University of Washington 1995

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Amihud, Y., and Mendelson, H.. “Trading Mechanisms and Stock Returns: An Empirical Investigation.” Journal of Finance, 42 (July 1987), 533–553.CrossRefGoogle Scholar
Anthony, J. H. “The Interrelation of Stock and Options Market Trading-Volume Data.” Journal of Finance, 43 (09 1988), 949–964.Google Scholar
Bhattacharya, M. “Price Changes of Related Securities: The Case of Call Options and Stocks.” Journal of Financial and Quantitative Analysis, 22 (03 1987), 1–16.CrossRefGoogle Scholar
Black, F., and Scholes, M. S.. “The Pricing of Options and Corporate Liabilities.” Journal of Political Economy, 81 (1973), 637–659.CrossRefGoogle Scholar
Chan, K.; Chung, Y. P.; and Johnson, H.. “Why Option Prices Lag Stock Prices: A Trading-Based Explanation.” Journal of Finance, 48 (12 1993), 1957–1967.Google Scholar
Cohen, K. J.; Hawawini, G. A.; Maier, S. F.; Schwartz, R. A.; and Whitcomb, D. K.. “Implications of Microstructure Theory for Empirical Research on Stock Price Behavior.” Journal of Finance, 35 (05 1980), 249–258.CrossRefGoogle Scholar
Cox, J. C., and Rubinstein, M.. Option Markets, Englewood Cliffs, NJ: Prentice-Hall (1985).Google Scholar
Dickey, D. A., and Fuller, W. A.. “The Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root.” Econometrica, 49 (07 1981), 1057–1072.CrossRefGoogle Scholar
Engle, R. F., and Granger, C. W. J.. “Co-integration and Error Correction: Representation, Estimation, and Testing.” Econometrica, 55 (03 1987), 251–276.CrossRefGoogle Scholar
Engle, R. F., and Yoo, B. S.. “Forecasting and Testing in Co-integrated Systems.” Journal of Econometrics, 35 (05 1987), 143–160.CrossRefGoogle Scholar
Finucane, T. J. “Put-Call Parity and Expected Returns.” Journal of Financial and Quantitative Analysis, 26 (12 1991), 445–458.CrossRefGoogle Scholar
Granger, C. W. J. “Investigating Causal Relations by Econometric Models and Cross-Spectral Methods.” Econometrica, 37 (07 1969), 424–438.CrossRefGoogle Scholar
Granger, C. W. J., and Newbold, P.. “Spurious Regressions in Econometrics.” Journal of Econometrics, 2 (05 1974), 111–120.CrossRefGoogle Scholar
Ingersoll, J. E. Jr., “A Contingent-Claim Valuation of Convertible Securities.” Journal of Financial Economics, 4 (05 1977), 289–321.CrossRefGoogle Scholar
Johansen, S. “Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models.” Econometrica, 59 (11 1991), 1551–1580.CrossRefGoogle Scholar
Lo, A. W., and Mackinlay, A. C.. “When are Contrarian Profits Due to Stock Market Overreaction?” Review of Financial Studies, 3 (1990), 175–205.CrossRefGoogle Scholar
Manaster, S., and Rendleman, R.. “Option Prices as Predictors of Equilibrium Stock Prices.” Journal of Finance, 37 (09 1982), 1043–1057.CrossRefGoogle Scholar
Mech, T. S. “Portfolio Return Autocorrelations.” Journal of Financial Economics, 34 (12 1993), 307–344.CrossRefGoogle Scholar
Stephan, J. A., and Whaley, R. E.. “Intraday Price Change and Trading Volume Relationships in the Stock and Stock Option Markets.” Journal of Finance, 45 (03 1990), 191–220.CrossRefGoogle Scholar
Stoll, H. R. “Alternative Views of Market Making.” In Market Making and the Changing Structure of the Securities Industries, Amihud, Y., Ho, T., and Schwartz, E., eds. New York, NY: Lexington Books (1985).Google Scholar
Yoo, B. S. “Three Essays on Cointegration.” Doctoral Diss., Univ. of California at San Diego (1987).Google Scholar