Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/107844
Authors: 
Wojtowicz, Marcin
Year of Publication: 
2014
Series/Report no.: 
Tinbergen Institute Discussion Paper 14-137/IV/DSF81
Abstract: 
We study risk and return properties of capital structure arbitrage strategies aiming to profit from temporal mispricing between equity and credit default swaps (CDSs) of companies. We find that capital structure arbitrage provides an attractive annualized return of 24.35% on invested capital. The arbitrage returns are higher for lower rated companies and surprisingly they are also higher for more liquid companies with larger CDS trading volumes. We find that the number of arbitrage trade opportunities can at times cluster and in our sample the concentration of trades occurs when they are most profitable, which highlights the issue of capital allocation. Constructing weekly return indices of capital structure arbitrage, we find that no more than 15% of the returns is explained by common risk factors.
Subjects: 
Capital structure arbitrage
credit defaults swaps
equities
limits to arbitrage
JEL: 
G11
G12
G14
G19
Document Type: 
Working Paper

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