Capital structure arbitrage


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Capital structure arbitrage

Vis færre oplysninger Bajlum, Claus en_US Tind Larsen, Peter en_US 2009-02-04T10:26:21Z 2009-02-04T10:26:21Z 2007-10-29T00:00:00Z en_US
dc.description.abstract When identifying relative value opportunities across credit and equity markets, the arbitrageur faces two major problems, namely positions based on model misspeci cation and mismeasured inputs. Using credit default swap data, this paper addresses both concerns in a convergence-type trading strategy. In spite of dierences in assumptions governing default and calibration, we nd the exact structural model linking the markets second to timely key inputs. Studying an equally-weighted portfolio of all relative value positions, the excess returns are insigni cant when based on a traditional volatility from historical equity returns. However, relying on an implied volatility from equity options results in a substantial gain in strategy execution and highly signi cant excess returns - even when small gaps are exploited. The gain is largest in the speculative grade segment, and cannot be explained from systematic market risk factors. Although the strategy may seem attractive at an aggregate level, positions on individual obligors can be very risky. en_US
dc.format.extent 43 en_US
dc.language eng en_US
dc.relation.ispartofseries Working paper;2007-230 en_US
dc.title Capital structure arbitrage en_US
dc.type wp en_US
dc.accessionstatus modt07okt29 nijemo en_US
dc.contributor.corporation Copenhagen Business School. CBS en_US
dc.contributor.department Institut for Finansiering en_US
dc.contributor.departmentshort FI en_US
dc.contributor.departmentuk Department of Finance en_US
dc.contributor.departmentukshort FI en_US
dc.description.notes Primær udgivelse fra CAF Working Papers, Centre for Analytical Finance, University of Aarhus/Aarhus School of Business en_US
dc.idnumber X076269 en_US København en_US
dc.publisher.year 2007 en_US
dc.title.subtitle Model choice and volatility calibration en_US

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