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 independently 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 and 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.
Original language | English |
---|---|
Pages (from-to) | 815-840 |
Number of pages | 26 |
Journal | European Journal of Finance |
Volume | 19 |
Issue number | 9 |
Early online date | 6 Feb 2012 |
DOIs | |
Publication status | Published - 2013 |
Keywords
- capital structure arbitrage
- credit default swaps
- portfolio management
- large-scale covariance estimation
- portfolio optimisation