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Are There Arbitrage Opportunities in Credit Derivatives Markets? A New Test and an Application to the Case of CDS and ASPs

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URI: http://hdl.handle.net/10016/5294
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NEWWP09-63SergioMayordomo.pdf (431.16 KB)
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2009-09
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This paper analyzes possible arbitrage opportunities in credit derivatives markets using selffinancing strategies combining Credit Default Swaps and Asset Swaps Packages. We present a new statistical arbitrage test based on the subsampling methodology which has lower Type I error than existing alternatives. Using four different databases covering the period from 2005 to 2009, long-run (cointegration) and statistical arbitrage analysis are performed. Before the subprime crisis, we find long-run arbitrage opportunities in 26% of the cases and statistical arbitrage opportunities in 24% of the cases. During the crisis, arbitrage opportunities decrease to 8% and 19%, respectively. Arbitrage opportunities are more frequent in the case of relatively low rated bonds and bonds with a high coupon rate.
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statistical arbitrage, credit derivatives, credit spreads, cointegration, subsampling
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DEE - Working Papers. Business Economics. WB
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