Yes / Based on a reduced-form model of credit risk, we explore mispricing in the CDS spreads of North
American companies and its economic content. Specifically, we develop a trading strategy using the
model to trade out of sample market-neutral portfolios across the term structure of CDS contracts. Our
empirical results show that the trading strategy exhibits abnormally large returns, confirming the existence
and persistence of a mispricing. The aggregate returns of the trading strategy are positively related
to the square of market-wide credit and liquidity risks, indicating that the mispricing is more pronounced
when the market is more volatile. When implemented on the Markit data, the strategy shows significant
economic value even after controlling for realistic transaction costs.
| Identifer | oai:union.ndltd.org:BRADFORD/oai:bradscholars.brad.ac.uk:10454/15730 |
| Date | 05 August 2018 |
| Creators | Jarrow, R., Li, H., Ye, Xiaoxia, Hu, M. |
| Source Sets | Bradford Scholars |
| Language | English |
| Detected Language | English |
| Type | Article, Accepted manuscript |
| Rights | (c) The Author(s) 2018. Published by Oxford University Press on behalf of the European Finance Association. All rights reserved. For permissions, please email: journals.permissions@oup.com |
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