Are there benefits to being naked? The returns and diversification impact of capital structure arbitrage
Research output: Contribution to journal › Article › peer-review
Electronic versions
DOI
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.
| Original language | English |
|---|---|
| Pages (from-to) | 815-840 |
| Journal | European Journal of Finance |
| Volume | 19 |
| Issue number | 9 |
| DOIs | |
| Publication status | Published - 2013 |
| Externally published | Yes |