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A New Test of Statistical Arbitrage with Applications to Credit Derivatives Markets

Sergio Mayordomo (), Juan Ignacio Peña and Juan Romo

No CNMV Working Papers no. 47. 2011, CNMV Working Papers from CNMV- Spanish Securities Markets Commission - Research and Statistics Department

Abstract: CONTENTS: This paper presents a new statistical arbitrage test which has lower Type I error and selects arbitrage opportunities with lower downside risk than existing alternatives. The test is applied to credit derivatives markets using strategies combining Credit Default Swaps and Asset Swaps. We find persistent mispricings before and during the current financial crisis. However, after considering funding and trading costs, these mispricings are unlikely to provide profitable arbitrage opportunities.

Keywords: Persistent Mispricings; Credit Derivatives; Credit Spreads; Subsampling (search for similar items in EconPapers)
JEL-codes: C12 G12 G14 (search for similar items in EconPapers)
Date: 2011
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