The economic significance of CDS price discovery

Xiang, Vincent, Chng, Michael T. and Fang, Victor 2015, The economic significance of CDS price discovery, Review of quantitative finance and accounting, vol. In press, pp. 1-30, doi: 10.1007/s11156-015-0540-2.

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Title The economic significance of CDS price discovery
Author(s) Xiang, Vincent
Chng, Michael T.
Fang, VictorORCID iD for Fang, Victor
Journal name Review of quantitative finance and accounting
Volume number In press
Start page 1
End page 30
Total pages 30
Publisher Springer
Place of publication New York, N.Y.
Publication date 2015
ISSN 0924-865X
Keyword(s) Price discovery
CDS spread
Credit risk
Portfolio strategy
Summary © 2015 Springer Science+Business Media New York 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.
Language eng
DOI 10.1007/s11156-015-0540-2
Field of Research 150201 Finance
150205 Investment and Risk Management
01 Mathematical Sciences
Socio Economic Objective 900101 Finance Services
HERDC Research category C1 Refereed article in a scholarly journal
Copyright notice ©2015, Springer
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Document type: Journal Article
Collections: Faculty of Business and Law
Department of Finance
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