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Title: Are there benefits to being naked? The returns and diversification impact of capital structure arbitrage
Authors: Calice, Giovanni
Chen, Jing
Williams, Julian M.
Keywords: Capital Structure Arbitrage
Credit Default Swaps
Portfolio Management
Large Scale Covariance Estimation
Portfolio Optimisation
Issue Date: 2013
Citation: CALICE, G., CHEN, J. and WILLIAMS, J.M., 2013. Are there benefits to being naked? The returns and diversification impact of capital structure arbitrage. European Journal of Finance, 19 (9), pp.815-840
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 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.
Description: This is a Submiited Manuscript of an article published by Taylor & Francis in The European Journal of Finance on 06/02/2012 available online: http://dx.doi.org/10.1080/1351847X.2011.637115
Version: Submitted for publication
DOI: 10.1080/1351847X.2011.637115
URI: https://dspace.lboro.ac.uk/2134/24211
Publisher Link: http://dx.doi.org/10.1080/1351847X.2011.637115
ISSN: 1351-847X
Appears in Collections:Published Articles (Business)

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