985數量經濟與金融系列講座第208期：The Role of Price Discovery in Capital Structure Arbitrage

題目：The Role of Price Discovery in Capital Structure Arbitrage

主講人🐜🧑🏻‍🦼： Prof. Michael Chng, Deakin University, Australia

Abstract

We examine the role of price discovery in capital structure arbitrage (CSA) between the credit default swap (CDS) and equity markets for 174 U.S. firms between Jan 2005 and Dec 2009. We instill long-run equilibrium by utilizing the cointegrating relation between each firm's market-observed and model-implied CDS spreads to specify the divergence condition. Furthermore, we incorporate short-run mispricing adjustments by applying Gonzalo-Granger (1995) and Hasbrouck (1995) measures to guide the allocation of capital between the CDS and equity positions. Compared to Yu (2006) and Duarte et al. (2007), our price discovery CSA algorithm achieves higher convergence ratios, shorter time to convergence and lower downside risk. More importantly, although the sample period covers the global financial crisis, our algorithm yields Sharpe ratios that are comparable to fixed-income arbitrage strategies which have been executed during normal market conditions.