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Are there benefits to being naked? The returns and diversification impact of capital structure arbitrage

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journal contribution
posted on 24.02.2017 by Giovanni Calice, Jing Chen, Julian M. Williams
In a naked credit default swap (CDS) position a party pays an income stream to a seller of protection to swap away default risk on an underlying defaultable security without actually holding this reference instrument. Using mark to market returns on a large cross section of CDS positions, held independently from their reference entity, we implement a novel test to establish whether their inclusion in an optimised portfolio is replicable by a large set of alternative assets. Overall, we nd signi cant excess returns of over 28% per annum against an optimised benchmark, we speculate that it is these characteristics that could be driving a bubble in the CDS market.

History

School

  • Business and Economics

Department

  • Business

Published in

European Journal of Finance

Volume

19

Issue

9

Pages

815 - 840

Citation

CALICE, G., CHEN, J. and WILLIAMS, J.M., 2013. Are there benefits to being naked? The returns and diversification impact of capital structure arbitrage. European Journal of Finance, 19 (9), pp.815-840

Version

SMUR (Submitted Manuscript Under Review)

Publisher statement

This work is made available according to the conditions of the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International (CC BY-NC-ND 4.0) licence. Full details of this licence are available at: https://creativecommons.org/licenses/by-nc-nd/4.0/

Acceptance date

01/10/2013

Publication date

2013

Notes

This is a Submiited Manuscript of an article published by Taylor & Francis in The European Journal of Finance on 06/02/2012 available online: http://dx.doi.org/10.1080/1351847X.2011.637115

ISSN

1351-847X

eISSN

1466-4364

Language

en

Exports