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

Calice, Giovanni, Chen, Jing and Williams, Julian (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. (doi:10.1080/1351847X.2011.637115).

Record type: Article

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 independent 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 find significant 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.

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More information

Accepted/In Press date: 2011
e-pub ahead of print date: 6 February 2012
Published date: 2013

Identifiers

Local EPrints ID: 193197
URI: http://eprints.soton.ac.uk/id/eprint/193197
ISSN: 1351-847X
PURE UUID: d9039c6c-993d-42f3-9760-ca3377c89cb1

Catalogue record

Date deposited: 12 Jul 2011 15:14
Last modified: 17 Aug 2017 16:35

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Contributors

Author: Giovanni Calice
Author: Jing Chen
Author: Julian Williams

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