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Trading strategies with implied forward credit default swap spreads
journal contribution
posted on 2023-06-09, 20:22 authored by Arturo Leccadito, Radu TunaruRadu Tunaru, Giovanni UrgaCredit default risk for an obligor can be hedged with either a credit default swap (CDS) or a constant maturity credit default swap (CMCDS). We find strong evidence of persistent differences in the hedging cost associated with the two comparable contracts. Between 2001 and 2006, it would have been more profitable to sell CDS and buy CMCDS while after the crisis between 2008 and 2013 the opposite strategy was profitable. Panel data tests indicate that for our sample period the implied forward CDS rates are unbiased estimates of future spot CDS rates. The changes in the company implied volatility is the main determinant of trading inefficiencies, followed by the changes in GDP and in the interest rates before the crisis, and the changes in sentiment index and in the VIX after the crisis.
History
Publication status
- Published
File Version
- Accepted version
Journal
Journal of Banking & FinanceISSN
0378-4266Publisher
ElsevierExternal DOI
Volume
58Page range
361-375Department affiliated with
- Accounting and Finance Publications
Research groups affiliated with
- Quantitative International Finance Network Publications
Full text available
- Yes
Peer reviewed?
- Yes
Legacy Posted Date
2020-01-23First Open Access (FOA) Date
2020-01-31First Compliant Deposit (FCD) Date
2020-01-31Usage metrics
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