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Price discovery and persistent arbitrage violations in credit markets

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posted on 2022-04-26, 21:22 authored by Hai LinHai Lin, K Man, J Wang, C Wu
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.

History

Preferred citation

Lin, H., Man, K., Wang, J. & Wu, C. (2020). Price discovery and persistent arbitrage violations in credit markets. Financial Management, 49(1), 207-233. https://doi.org/10.1111/fima.12261

Journal title

Financial Management

Volume

49

Issue

1

Publication date

2020-03-01

Pagination

207-233

Publisher

Wiley

Publication status

Published

Online publication date

2019-02-13

ISSN

0046-3892

eISSN

1755-053X

Language

en

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