Trading strategies with implied forward credit default swap spreads

Leccadito, Arturo, Tunaru, Radu S and Urga, Giovanni (2015) Trading strategies with implied forward credit default swap spreads. Journal of Banking & Finance, 58. pp. 361-375. ISSN 0378-4266

[img] PDF - Accepted Version
Available under License Creative Commons Attribution-NonCommercial No Derivatives.

Download (394kB)

Abstract

Credit 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.

Item Type: Article
Keywords: Statistical arbitrage; Forward credit spreads; Convexity adjustmentForward rate unbiasedness hypothesisPanel data
Schools and Departments: University of Sussex Business School > Accounting and Finance
Research Centres and Groups: Quantitative International Finance Network
Subjects: H Social Sciences > HG Finance > HG3691 Credit. Debt. Loans
H Social Sciences > HG Finance > HG4501 Investment, capital formation, speculation > HG4529 Investment analysis. Technical analysis
Depositing User: Radu Tunaru
Date Deposited: 23 Jan 2020 12:04
Last Modified: 31 Jan 2020 10:30
URI: http://sro.sussex.ac.uk/id/eprint/89498

View download statistics for this item

📧 Request an update