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Trading strategies with implied forward credit default swap spreads

Author

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  • Leccadito, Arturo
  • Tunaru, Radu S.
  • Urga, Giovanni

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.

Suggested Citation

  • Leccadito, Arturo & Tunaru, Radu S. & Urga, Giovanni, 2015. "Trading strategies with implied forward credit default swap spreads," Journal of Banking & Finance, Elsevier, vol. 58(C), pages 361-375.
    • Handle: RePEc:eee:jbfina:v:58:y:2015:i:c:p:361-375
    DOI: 10.1016/j.jbankfin.2015.04.018
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    References listed on IDEAS

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    More about this item

    Keywords

    Statistical arbitrage; Forward credit spreads; Convexity adjustment; Forward rate unbiasedness hypothesis; Panel data;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G19 - Financial Economics - - General Financial Markets - - - Other
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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