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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
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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

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