Are There Arbitrage Opportunities in Credit Derivatives Markets? A New Test and an Application to the Case of CDS and ASPs
AbstractThis paper analyzes possible arbitrage opportunities in credit derivatives markets using selffinancing strategies combining Credit Default Swaps and Asset Swaps Packages. We present a new statistical arbitrage test based on the subsampling methodology which has lower Type I error than existing alternatives. Using four different databases covering the period from 2005 to 2009, long-run (cointegration) and statistical arbitrage analysis are performed. Before the subprime crisis, we find long-run arbitrage opportunities in 26% of the cases and statistical arbitrage opportunities in 24% of the cases. During the crisis, arbitrage opportunities decrease to 8% and 19%, respectively. Arbitrage opportunities are more frequent in the case of relatively low rated bonds and bonds with a high coupon rate.
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statistical arbitrage; credit derivatives; credit spreads; cointegration; subsampling;
Other versions of this item:
- Sergio Mayordomo & Juan Ignacio Peña & Juan Romo, 2009. "Are There Arbitrage Opportunities in Credit Derivatives Markets? A New Test and an Application to the Case of CDS and ASPs," Business Economics Working Papers wb096303, Universidad Carlos III, Departamento de Economía de la Empresa.
- C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
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