Capital Structure Arbitrage revisited

Marcin Wojtowicz
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Marcin Wojtowicz: VU University Amsterdam, the Netherlands

Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: We study risk and return properties of capital structure arbitrage strategies aiming to profit from temporal mispricing between equity and credit default swaps (CDSs) of companies. We find that capital structure arbitrage provides an attractive annualized return of 24.35% on invested capital. The arbitrage returns are higher for lower rated companies and surprisingly they are also higher for more liquid companies with larger CDS trading volumes. We find that the number of arbitrage trade opportunities can at times cluster and in our sample the concentration of trades occurs when they are most profitable, which highlights the issue of capital allocation. Constructing weekly return indices of capital structure arbitrage, we find that no more than 15% of the returns is explained by common risk factors.

Keywords: Capital structure arbitrage; credit defaults swaps; equities; limits to arbitrage (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 G19 (search for similar items in EconPapers)
Date: 2014-10-20
New Economics Papers: this item is included in nep-cfn
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Citations: View citations in EconPapers (2)

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