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

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  • Henide, Karim

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.

Suggested Citation

  • Henide, Karim, 2022. "Cross-currency credit spreads: harvesting the idiosyncratic basis as a source of ARP," LSE Research Online Documents on Economics 124686, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:124686
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    File URL: http://eprints.lse.ac.uk/124686/
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    References listed on IDEAS

    as
    1. Baba, Naohiko & Packer, Frank, 2009. "From turmoil to crisis: Dislocations in the FX swap market before and after the failure of Lehman Brothers," Journal of International Money and Finance, Elsevier, vol. 28(8), pages 1350-1374, December.
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    More about this item

    Keywords

    alternative risk premia; covered interest rate parity; fixed income; static arbitrage;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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