TY - JOUR

T1 - Are there benefits to being naked? The returns and diversification impact of capital structure arbitrage

AU - Calice, G

AU - Chen, J

AU - Williams, JM

PY - 2013

Y1 - 2013

N2 - 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 independent 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 find significant 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.

AB - 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 independent 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 find significant 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.

U2 - 10.1080/1351847X.2011.637115

DO - 10.1080/1351847X.2011.637115

M3 - Article

VL - 19

SP - 815

EP - 840

JO - European Journal of Finance

JF - European Journal of Finance

SN - 1351-847X

IS - 9

ER -