Evaluation of Capital Structure Arbitrage in the Equity-Credit Markets
(2007)Department of Business Administration
- Abstract
- Purpose: The purpose of this thesis is to test for the existence of Capital Structure Arbitrage oppertunities in the equity-credit markets. Methodology: The mispricing of Credit Default Swap contracts are calculated and used as input in an Equity-Credit market trading strategy. The returns are then evaluated with a modified Value-at-Risk simulation. Theoretical perspectives: A Merton-based structural model, CreditGrades, is used for credit pricing and a mispricing-convergence trading-strategy between the credit and equity markets is implemented. Empirical foundation: Daily quotes for the Credit Default Swap spread of 37 European firms were collected for a period of two years, as well as equity-prices for the same period and the previous... (More)
- Purpose: The purpose of this thesis is to test for the existence of Capital Structure Arbitrage oppertunities in the equity-credit markets. Methodology: The mispricing of Credit Default Swap contracts are calculated and used as input in an Equity-Credit market trading strategy. The returns are then evaluated with a modified Value-at-Risk simulation. Theoretical perspectives: A Merton-based structural model, CreditGrades, is used for credit pricing and a mispricing-convergence trading-strategy between the credit and equity markets is implemented. Empirical foundation: Daily quotes for the Credit Default Swap spread of 37 European firms were collected for a period of two years, as well as equity-prices for the same period and the previous two years, used for model calibration. Conclusions: The trading shows a statistically significant total return of the Capital Structure Arbitrage trading strategy of 32,9%, compared to 10,8% with pure Credit Default Swap speculation. The equity-hedge of the strategy effectively lowers Value-at-Risk, and thus results in a higher return, which supports the argument for Capital Structure oppertunities. The results however, are very volatile, something that might suggest that the strategy chosen is closer to speculation than arbitrage. (Less)
Please use this url to cite or link to this publication:
http://lup.lub.lu.se/student-papers/record/1346370
- author
- Zakrisson, Daniel ; Hedberg, Fredrik ; Ferm, Daniel and Danilina, Natalia
- supervisor
- organization
- year
- 2007
- type
- H1 - Master's Degree (One Year)
- subject
- keywords
- Capital Structure Arbitrage, Credit Default Swaps, Creditgrades, Value-at-Risk, Arbitrage Trading, Management of enterprises, Företagsledning, management
- language
- Swedish
- id
- 1346370
- date added to LUP
- 2007-06-07 00:00:00
- date last changed
- 2012-04-02 16:47:24
@misc{1346370,
abstract = {{Purpose: The purpose of this thesis is to test for the existence of Capital Structure Arbitrage oppertunities in the equity-credit markets. Methodology: The mispricing of Credit Default Swap contracts are calculated and used as input in an Equity-Credit market trading strategy. The returns are then evaluated with a modified Value-at-Risk simulation. Theoretical perspectives: A Merton-based structural model, CreditGrades, is used for credit pricing and a mispricing-convergence trading-strategy between the credit and equity markets is implemented. Empirical foundation: Daily quotes for the Credit Default Swap spread of 37 European firms were collected for a period of two years, as well as equity-prices for the same period and the previous two years, used for model calibration. Conclusions: The trading shows a statistically significant total return of the Capital Structure Arbitrage trading strategy of 32,9%, compared to 10,8% with pure Credit Default Swap speculation. The equity-hedge of the strategy effectively lowers Value-at-Risk, and thus results in a higher return, which supports the argument for Capital Structure oppertunities. The results however, are very volatile, something that might suggest that the strategy chosen is closer to speculation than arbitrage.}},
author = {{Zakrisson, Daniel and Hedberg, Fredrik and Ferm, Daniel and Danilina, Natalia}},
language = {{swe}},
note = {{Student Paper}},
title = {{Evaluation of Capital Structure Arbitrage in the Equity-Credit Markets}},
year = {{2007}},
}