Cross-currency credit spreads: harvesting the idiosyncratic basis as a source of ARP

Karim Henide

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This paper identifies the “idiosyncratic basis”, the residual premia computed from stripping away the hypothetical cross-currency basis (CCB) from the cross-currency credit spread (CCCS) of eligible senior corporate dollar-denominated bonds relative to their hypothetical euro-denominated comparator of identical seniority, duration, credit risk and issuer. The adherence of the idiosyncratic basis to the no-arbitrage condition is subsequently evaluated through the application of an indicative market-neutral credit strategy that is designed to harvest the apparent static arbitrage opportunities. The success of the strategy, which systematically captures the idiosyncratic basis as it adheres to the no-arbitrage conditions, is validated retrospectively to frame the basis as an additional class of alternative risk premia (ARP), which investors can seek to optimise exposure to in a long-only context.

Keywords: alternative risk premia; covered interest rate parity; fixed income; static arbitrage (search for similar items in EconPapers)
JEL-codes: F31 G12 G15 (search for similar items in EconPapers)
Pages: 15 pages
Date: 2022-04-27
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Published in Journal of Derivatives and Quantitative Studies, 27, April, 2022, 30(2), pp. 74-88. ISSN: 1229-988X

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:124686

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