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    Exploring Statistical Arbitrage Opportunities in the Term Structure of CDS Spreads

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    Publication date
    2016-08-01
    Author
    Jarrow, R.A.
    Li, H.
    Ye, Xiaoxia
    Keyword
    Credit default swaps; Statistical arbitrage; Affine models; Market-neutral strategy; Hedge funds
    Peer-Reviewed
    No
    
    Metadata
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    Abstract
    Based on a reduced-form model of credit risk, we explore statistical arbitrage opportunities in the CDS spreads of North American companies. Specifically, we develop a trading strategy using the model to trade market-neutral portfolios while controlling for realistic transaction costs. Empirical results show that our arbitrage strategy is of significant economic value, and also cast doubt on the efficiency of the CDS market. The aggregate returns of the trading strategy are positively related to the square of market-wide credit and liquidity risks, indicating that the market is less efficient when it is more volatile.
    URI
    http://hdl.handle.net/10454/14323
    Version
    No full-text in the repository
    Citation
    Jarrow RA, Li H and Ye X (2016) Exploring Statistical Arbitrage Opportunities in the Term Structure of CDS Spreads.
    Link to publisher’s version
    https://dx.doi.org/10.2139/ssrn.2686284
    Type
    Report
    Collections
    Management and Law Publications

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