Price discovery and persistent arbitrage violations in credit markets

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

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Original languageEnglish
Pages (from-to)207-233
Journal / PublicationFinancial Management
Volume49
Issue number1
Online published13 Feb 2019
Publication statusPublished - 2020

Abstract

This paper investigates price violations in credit markets using a data sample spanning from 2002 to 2016. We find that price violations are highly persistent during the crisis period, particularly for speculative-grade bonds. There is evidence that price distortions and market disintegration are linked to market-wide and firm-level impediments to arbitrage and limited capital provision. Higher firm-level impediments to arbitrage lead to less market integration, and more severe and persistent pricing discrepancies. Moreover, we find that the negative CDS basis persists in the postcrisis period, which is attributable to dealers’ lower capital commitment and deterioration in market-making quality.

Citation Format(s)

Price discovery and persistent arbitrage violations in credit markets. / Lin, Hai; Man, Kasing; Wang, Junbo; Wu, Chunchi.

In: Financial Management, Vol. 49, No. 1, 2020, p. 207-233.

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review