Are there benefits to being naked? The returns and diversification impact of capital structure arbitrage
journal contributionposted on 24.02.2017 by Giovanni Calice, Jing Chen, Julian M. Williams
Any type of content formally published in an academic journal, usually following a peer-review process.
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.
- Business and Economics