Same Underlying, Different Markets: How Convertible Bond Trading Drives Risk Spillovers

This paper examines how trading in securities with the same underlying asset but different market structures generate risk spillovers. Using intraday high-frequency and order-level data for A-share stocks and convertible bonds in China, we find trading shocks in convertible bonds significantly increase the risk of the corresponding stocks and strengthen intraday tail dependence between convertible bonds and their underlying stocks. Active convertible bond trading does not enhance stock price discovery; instead, it intensifies quantitative and speculative trading in the underlying stocks, particularly for micro-cap and Shenzhen-listed stocks. Risk mitigation measures, such as limiting convertible bond trading to qualified investors or increasing transaction costs to restrain trading frequency, can substantially dampen these spillover effects.