Rethinking Capital Structure Arbitrage: <i>A Price Discovery Perspective</i>

Avino, Davide ORCID: 0000-0002-5314-2067 and Lazar, Emese (2020) Rethinking Capital Structure Arbitrage: <i>A Price Discovery Perspective</i>. JOURNAL OF ALTERNATIVE INVESTMENTS, 22 (4). pp. 75-91.

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Abstract

The capital structure arbitrage strategy exploits the discrepancies between the credit default swap and equity markets. It assumes that both markets instantaneously react to new information, so it fails to take into account the lead-lag relationships between the prices in the two markets and their form of cointegration. The authors introduce three new alternative strategies that exploit the information provided by the time-varying price discovery of the equity and credit markets and the cointegration of the two markets. The authors implement the strategies for US and European obligors and find that these outperform traditional arbitrage trading during the financial crisis. Furthermore, the returns of the new strategies have a lower correlation with market returns than the standard capital structure arbitrage.

Item Type:	Article
Uncontrolled Keywords:	credit spreads, price discovery, credit derivatives, information flow, convergence trading, financial crisis, limit of arbitrage
Depositing User:	Symplectic Admin
Date Deposited:	17 May 2019 07:33
Last Modified:	17 Oct 2023 11:34
DOI:	10.3905/jai.2020.1.093
Related URLs:	Author Publisher
URI:	https://livrepository.liverpool.ac.uk/id/eprint/3041296