Post by Sapphire Capital on Jan 5, 2009 22:11:22 GMT 4
CMCDS Premia Implicit in the Term Structure of Corporate CDS Spreads
Arturo Leccadito
City University London - Sir John Cass Business School
Radu Tunaru
City University London - Faculty of Finance
Giovanni Urga
Sir John Cass Business School, London
October 12, 2008
AFFI/EUROFIDAI, Paris December 2008 Finance International Meeting AFFI - EUROFIDAI
Abstract:
Credit default risk for an obligor can be hedged away with either a credit default swap (CDS) contract or the alternative constant maturity credit default swap contract (CMCDS). An economic agent should be indifferent to which instrument is used since both cover the same risk with identical payoffs. On a large universe of obligors we find strong evidence that there is persistent difference in the hedging premia carried by the two comparable contracts. It appears that, in general, it is more profitable to sell CDS and buy CMCDS. In addition, as expected, the implied forward CDS rates are not an unbiased estimate of the future spot CDS rates.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1291746_code1130649.pdf?abstractid=1283183&mirid=1
Arturo Leccadito
City University London - Sir John Cass Business School
Radu Tunaru
City University London - Faculty of Finance
Giovanni Urga
Sir John Cass Business School, London
October 12, 2008
AFFI/EUROFIDAI, Paris December 2008 Finance International Meeting AFFI - EUROFIDAI
Abstract:
Credit default risk for an obligor can be hedged away with either a credit default swap (CDS) contract or the alternative constant maturity credit default swap contract (CMCDS). An economic agent should be indifferent to which instrument is used since both cover the same risk with identical payoffs. On a large universe of obligors we find strong evidence that there is persistent difference in the hedging premia carried by the two comparable contracts. It appears that, in general, it is more profitable to sell CDS and buy CMCDS. In addition, as expected, the implied forward CDS rates are not an unbiased estimate of the future spot CDS rates.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1291746_code1130649.pdf?abstractid=1283183&mirid=1