Healthy...Distress... Default

Zura Kakushadze

Journal of Risk & Control, 2019, vol. 6, issue 1, 113-119

Abstract: We discuss a simple, exactly solvable model of stochastic stock dynamics that incorporates regime switching between healthy and distressed regimes. Using this model, which is analytically tractable, we discuss a way of extracting expected returns for stocks from realized CDS spreads, essentially, the CDS market sentiment about future stock returns. This alpha/signal could be useful in a cross-sectional (statistical arbitrage) context for equities trading.

Keywords: stock; CDS spread; healthy; distress; default; stochastic dynamics; statistical arbitrage; alpha; regime switching; expected return; market sentiment; equities trading (search for similar items in EconPapers)
JEL-codes: G00 G10 G11 G12 G23 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:rmk:rmkjrc:v:6:y:2019:i:1:p:113-119

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