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Are there benefits to being naked? The returns and diversification impact of capital structure arbitrage

Giovanni Calice, Maggie Chen, Julian M Williams

The European Journal of Finance, Volume: 19, Issue: 9, Pages: 815 - 840

Swansea University Author: Maggie Chen

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DOI (Published version): 10.1080/1351847X.2011.637115

Abstract

In a naked credit default swap (CDS) position a party pays an income stream to a seller of protection to swap away default risk on an underlying defaultable security without actually holding this reference instrument. Using mark to market returns on a large cross section of CDS positions, held indep...

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Published in: The European Journal of Finance
ISSN: 1351-847X
Published: 2013
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URI: https://cronfa.swan.ac.uk/Record/cronfa6734
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first_indexed 2013-07-23T11:55:20Z
last_indexed 2018-02-09T04:34:13Z
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spelling 2013-11-05T11:35:57.2435672 v2 6734 2012-01-23 Are there benefits to being naked? The returns and diversification impact of capital structure arbitrage 84886845de6e6c3a4d460fc5e68ac18e Maggie Chen Maggie Chen true false 2012-01-23 BAF In a naked credit default swap (CDS) position a party pays an income stream to a seller of protection to swap away default risk on an underlying defaultable security without actually holding this reference instrument. Using mark to market returns on a large cross section of CDS positions, held independently from their reference entity, we implement a novel test to establish whether their inclusion in an optimised portfolio is replicable by a large set of alternative assets. Overall, we nd signi cant excess returns of over 28% per annum against an optimised benchmark, we speculate that it is these characteristics that could be driving a bubble in the CDS market. Journal Article The European Journal of Finance 19 9 815 840 1351-847X Capital Structure Arbitrage, Credit Default Swaps, Portfolio Management, Large Scale 31 12 2013 2013-12-31 10.1080/1351847X.2011.637115 COLLEGE NANME Accounting and Finance COLLEGE CODE BAF Swansea University 2013-11-05T11:35:57.2435672 2012-01-23T13:59:21.5070000 Faculty of Humanities and Social Sciences School of Management - Accounting and Finance Giovanni Calice 1 Maggie Chen 2 Julian M Williams 3
title Are there benefits to being naked? The returns and diversification impact of capital structure arbitrage
spellingShingle Are there benefits to being naked? The returns and diversification impact of capital structure arbitrage
Maggie Chen
title_short Are there benefits to being naked? The returns and diversification impact of capital structure arbitrage
title_full Are there benefits to being naked? The returns and diversification impact of capital structure arbitrage
title_fullStr Are there benefits to being naked? The returns and diversification impact of capital structure arbitrage
title_full_unstemmed Are there benefits to being naked? The returns and diversification impact of capital structure arbitrage
title_sort Are there benefits to being naked? The returns and diversification impact of capital structure arbitrage
author_id_str_mv 84886845de6e6c3a4d460fc5e68ac18e
author_id_fullname_str_mv 84886845de6e6c3a4d460fc5e68ac18e_***_Maggie Chen
author Maggie Chen
author2 Giovanni Calice
Maggie Chen
Julian M Williams
format Journal article
container_title The European Journal of Finance
container_volume 19
container_issue 9
container_start_page 815
publishDate 2013
institution Swansea University
issn 1351-847X
doi_str_mv 10.1080/1351847X.2011.637115
college_str Faculty of Humanities and Social Sciences
hierarchytype
hierarchy_top_id facultyofhumanitiesandsocialsciences
hierarchy_top_title Faculty of Humanities and Social Sciences
hierarchy_parent_id facultyofhumanitiesandsocialsciences
hierarchy_parent_title Faculty of Humanities and Social Sciences
department_str School of Management - Accounting and Finance{{{_:::_}}}Faculty of Humanities and Social Sciences{{{_:::_}}}School of Management - Accounting and Finance
document_store_str 0
active_str 0
description In a naked credit default swap (CDS) position a party pays an income stream to a seller of protection to swap away default risk on an underlying defaultable security without actually holding this reference instrument. Using mark to market returns on a large cross section of CDS positions, held independently from their reference entity, we implement a novel test to establish whether their inclusion in an optimised portfolio is replicable by a large set of alternative assets. Overall, we nd signi cant excess returns of over 28% per annum against an optimised benchmark, we speculate that it is these characteristics that could be driving a bubble in the CDS market.
published_date 2013-12-31T03:08:17Z
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score 10.997933

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