Price discovery and persistent arbitrage violations in credit markets |
| |
| Authors: | Hai Lin Kasing Man Junbo Wang Chunchi Wu |
| |
| Institution: | 1. School of Economics and Finance, Victoria University of Wellington, Wellington, New Zealand;2. College of Business and Technology, Western Illinois University, Macomb, IL;3. School of Economics and Finance, City University of Hong Kong, Kowloon Tong, Hong Kong;4. School of Management, State University of New York at Buffalo, Buffalo, NY |
| |
| 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. |
| |
| Keywords: | |
|
|
