Limited Arbitrage between Equity and Credit Markets

@inproceedings{Kapadia2010LimitedAB,
  title={Limited Arbitrage between Equity and Credit Markets},
  author={Nikunj Kapadia and Xiaoling Pu},
  year={2010}
}
Proposing a statistical measure of market integration, we investigate whether limits to arbitrage explain the level of integration between firms’ equity and credit markets. We find cross-sectional and timeseries variation in equity-credit market pricing discrepancies are explained by variables associated with market liquidity, funding liquidity, and idiosyncratic risk. Illiquidity of the CDS market is particularly important in determining cross-sectional variation in integration. Our evidence… CONTINUE READING
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