Manuscript_CDS_2011.pdf (1.34 MB)
Download fileAre there benefits to being naked? The returns and diversification impact of capital structure arbitrage
journal contribution
posted on 2017-02-24, 09:38 authored by Giovanni CaliceGiovanni Calice, Jing Chen, Julian M. WilliamsIn 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.
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