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Capital Structure Arbitrage revisited

Author

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  • Marcin Wojtowicz

    (VU University Amsterdam, the Netherlands)

Abstract

We study risk and return properties of capital structure arbitrage strategies aiming to profit from temporal mispricing between equity and credit default swaps (CDSs) of companies. We find that capital structure arbitrage provides an attractive annualized return of 24.35% on invested capital. The arbitrage returns are higher for lower rated companies and surprisingly they are also higher for more liquid companies with larger CDS trading volumes. We find that the number of arbitrage trade opportunities can at times cluster and in our sample the concentration of trades occurs when they are most profitable, which highlights the issue of capital allocation. Constructing weekly return indices of capital structure arbitrage, we find that no more than 15% of the returns is explained by common risk factors.

Suggested Citation

  • Marcin Wojtowicz, 2014. "Capital Structure Arbitrage revisited," Tinbergen Institute Discussion Papers 14-137/IV/DSF81, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20140137
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    References listed on IDEAS

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    Cited by:

    1. Peter J. Zeitsch, 2017. "Capital Structure Arbitrage under a Risk-Neutral Calibration," JRFM, MDPI, vol. 10(1), pages 1-23, January.
    2. Specht, Leon, 2023. "An Empirical Analysis of European Credit Default Swap Spread Dynamics," Junior Management Science (JUMS), Junior Management Science e. V., vol. 8(1), pages 1-42.

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    More about this item

    Keywords

    Capital structure arbitrage; credit defaults swaps; equities; limits to arbitrage;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G19 - Financial Economics - - General Financial Markets - - - Other

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