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.

(2015). Trading strategies with implied forward credit default swap spreads [journal article - articolo]. In JOURNAL OF BANKING & FINANCE. Retrieved from http://hdl.handle.net/10446/55119

Trading strategies with implied forward credit default swap spreads

Leccadito, Arturo;Urga, Giovanni
2015-01-01

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.
articolo
2015
Leccadito, Arturo; Tunaru, Radu S.; Urga, Giovanni
(2015). Trading strategies with implied forward credit default swap spreads [journal article - articolo]. In JOURNAL OF BANKING & FINANCE. Retrieved from http://hdl.handle.net/10446/55119
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Descrizione: link to the formal publication via its DOI: 10.1016/j.jbankfin.2015.04.018
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/10446/55119
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