Examining the recent rising preferred perpetuals and its market anomaly in high yield space
Name
1119721607-MIT.pdf
Size
2.66 MB
Format
Adobe PDF
Checksum (MD5)
55507a5969cb5587bf1f278f31f8ee89
Author(s)
Lee, Junghwan(Junghwan Steve)
Advisor(s)
David Thesmar.
Date Issued
2019
Publisher
Massachusetts Institute of Technology
Abstract
Since late 2017 when the worldwide business optimism was at its highest, highly leveraged energy companies began to issue unique preferred shares that have character of perpetual subordinated bond and that trade in bond market. Among those firms, DCP Midstream issued another preferred shares that have same feature, but trade in mezzanine market. This paper explores the recent rising preferred shares and its market inefficiency, especially between bond market (par 1000) and mezzanine market (par 25). Assuming the firm exercise its call option for both securities, the paper finds that one can construct a profitable arbitrage strategy with annual Sharpe ratio of 1.775 from these two almost identical securities. My results bring some empirical substance to the discussion on the law of one price in financial markets. Although there are some limitations such as transaction costs and liquidity issues, this market has a degree of inefficiency.
Description
Thesis: M. Fin., Massachusetts Institute of Technology, Sloan School of Management, Master of Finance Program, 2019
Cataloged from PDF version of thesis.
Includes bibliographical references (page 26).
Subjects
Sloan School of Management. Master of Finance Program.
MIT Department
Sloan School of Management. Master of Finance Program
Sloan School of Management
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