Short selling activities and convertible bond arbitrage

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The main cause of financial crises often stems from overly optimistic investing, which skews market prices away from fundamental values. In the aftermath of market downturns, pessimists or short sellers frequently face public blame. Despite ongoing debates about short selling, it remains a misunderstood yet essential tool for hedge funds engaged in speculation and arbitrage. Investigating short selling's motivations and its impact on stock returns is crucial, as empirical studies on this topic are still emerging. In his doctoral thesis, Sebastian explores convertible bond arbitrage, a common hedge fund strategy that involves taking a long position in a convertible bond while simultaneously holding a significant short position in the underlying stock. This short selling acts as a hedge against stock price fluctuations, necessitating continuous adjustments to maintain the hedge. Consequently, companies with outstanding convertible bonds tend to experience higher short selling activity compared to those without. Additionally, stocks with convertible bonds may process fundamental information differently, as stock price reactions to this information are often accompanied by short selling from convertible bond arbitrageurs.