Exploring Mispricing in the Term Structure of CDS Spreads*
| Autor: | Robert A. Jarrow, Meixia Hu, Xiaoxia Ye, Haitao Li |
|---|---|
| Rok vydání: | 2018 |
| Předmět: |
Transaction cost
Economics and Econometrics 050208 finance Statistical arbitrage Credit default swap business.industry 05 social sciences Monetary economics Hedge fund Market neutral Market liquidity Accounting 0502 economics and business Economics Trading strategy 050207 economics business Finance Credit risk |
| Zdroj: | Review of Finance |
| ISSN: | 1573-692X 1572-3097 |
| DOI: | 10.1093/rof/rfy014 |
| Popis: | Based on a reduced-form model of credit risk, we explore mispricing in the credit default swaps (CDS) spreads of North American companies and its economic content. Specifically, we develop a trading strategy using the model to trade out of sample market-neutral portfolios across the term structure of CDS contracts. Our empirical results show that the trading strategy exhibits abnormally large returns, confirming the existence and persistence of a mispricing. The aggregate returns of the trading strategy are positively related to the square of market-wide credit and liquidity risks, indicating that the mispricing is more pronounced when the market is more volatile. When implemented on the Markit data, the strategy shows significant economic value even after controlling for realistic transaction costs. |
| Databáze: | OpenAIRE |
| Externí odkaz: |
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