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Healthy... Distress... Default

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  • Zura Kakushadze

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.

Suggested Citation

  • Zura Kakushadze, 2019. "Healthy... Distress... Default," Papers 1910.08531, arXiv.org, revised Oct 2019.
    • Handle: RePEc:arx:papers:1910.08531
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    File URL: http://arxiv.org/pdf/1910.08531
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    References listed on IDEAS

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    1. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    2. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 8, pages 229-288, World Scientific Publishing Co. Pte. Ltd..
    3. Zura Kakushadze, 2016. "On Origins of Bubbles," Papers 1610.03769, arXiv.org, revised Jul 2017.
    4. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    5. Zura Kakushadze, 2017. "On Origins of Bubbles," Journal of Risk & Control, Risk Market Journals, vol. 4(1), pages 1-30.
    6. Zura Kakushadze & Juan Andrés Serur, 2018. "151 Trading Strategies," Springer Books, Springer, number 978-3-030-02792-6, February.
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    Cited by:

    1. Zura Kakushadze, 2020. "Option Pricing: Channels, Target Zones and Sideways Markets," Papers 2006.14121, arXiv.org.

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