Trading strategies with implied forward credit default swap spreads

Arturo Leccadito, Radu S. Tunaru and Giovanni Urga

Journal of Banking & Finance, 2015, vol. 58, issue C, 361-375

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.

Keywords: Statistical arbitrage; Forward credit spreads; Convexity adjustment; Forward rate unbiasedness hypothesis; Panel data (search for similar items in EconPapers)
JEL-codes: C58 G13 G19 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:58:y:2015:i:c:p:361-375

DOI: 10.1016/j.jbankfin.2015.04.018

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