The economic significance of CDS price discovery

The economic significance of CDS price discovery Between 2005 and 2009, we document evident time-varying credit risk price discovery between the equity and credit default swap (CDS) markets for 174 US non-financial investment-grade firms. We test the economic significance of a simple portfolio strategy that utilizes fluctuation in CDS spreads as a trading signal to set stock positions, conditional on the CDS price discovery status of the reference entities. We show that a conditional portfolio strategy which updates the list of CDS-influenced firms over time, yields a substantively larger realized return net of transaction cost over the unconditional strategy. Furthermore, the conditional strategy’s Sharpe ratio outperforms a series of benchmark portfolios over the same trading period, including buy-and-hold, momentum and dividend yield strategies. Review of Quantitative Finance and Accounting Springer Journals

The economic significance of CDS price discovery

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Springer US
Copyright © 2015 by Springer Science+Business Media New York
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
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