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Price convergence between credit default swap and put option: New evidence

Research output: Contribution to Journal/Magazine › Journal article › peer-review

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Price convergence between credit default swap and put option: New evidence. / Chan, Ka Kei; Kolokolova, Olga; Lin, Ming-Tsung et al.
In: Journal of Empirical Finance, Vol. 72, 30.06.2023, p. 188-213.

Research output: Contribution to Journal/Magazine › Journal article › peer-review

Harvard

Chan, KK, Kolokolova, O, Lin, M-T & Poon, SH 2023, 'Price convergence between credit default swap and put option: New evidence', Journal of Empirical Finance, vol. 72, pp. 188-213. https://doi.org/10.1016/j.jempfin.2023.03.008

APA

Chan, K. K., Kolokolova, O., Lin, M-T., & Poon, S. H. (2023). Price convergence between credit default swap and put option: New evidence. Journal of Empirical Finance, 72, 188-213. https://doi.org/10.1016/j.jempfin.2023.03.008

Vancouver

Chan KK, Kolokolova O, Lin M-T, Poon SH. Price convergence between credit default swap and put option: New evidence. Journal of Empirical Finance. 2023 Jun 30;72:188-213. Epub 2023 Mar 23. doi: 10.1016/j.jempfin.2023.03.008

Author

Chan, Ka Kei ; Kolokolova, Olga ; Lin, Ming-Tsung et al. / Price convergence between credit default swap and put option : New evidence. In: Journal of Empirical Finance. 2023 ; Vol. 72. pp. 188-213.

Bibtex

@article{5ba7820eae584841bea501a0d576f4ff,
title = "Price convergence between credit default swap and put option: New evidence",
abstract = "Credit default swaps and deep out-of-the-money put options can be used for credit protection, but these markets are not perfectly integrated, leading to different implied hazard rates. The differences in the implied hazard rates are linked to deviations between consensus rating-based hazard rate curves in the two markets, and a residual component related to market frictions. We show that both components diminish over time, but their convergence is asynchronous. A trading strategy based on a joint signal from the curve and residual differences outperforms a conventional trading approach that relies on the absolute differences between the implied hazard rates. Hedge funds are likely to exploit within-market inefficiencies and deviations from rating-based curve, but they do not seem to profit from market segmentation.",
keywords = "Convergence, Credit default swap (CDS), Deep out-of-the-money put option, Market segmentation, Trading strategy",
author = "Chan, {Ka Kei} and Olga Kolokolova and Ming-Tsung Lin and Poon, {Ser Huang}",
year = "2023",
month = jun,
day = "30",
doi = "10.1016/j.jempfin.2023.03.008",
language = "English",
volume = "72",
pages = "188--213",
journal = "Journal of Empirical Finance",
issn = "0927-5398",
publisher = "Elsevier",

}

RIS

TY - JOUR

T1 - Price convergence between credit default swap and put option

T2 - New evidence

AU - Chan, Ka Kei

AU - Kolokolova, Olga

AU - Lin, Ming-Tsung

AU - Poon, Ser Huang

PY - 2023/6/30

Y1 - 2023/6/30

N2 - Credit default swaps and deep out-of-the-money put options can be used for credit protection, but these markets are not perfectly integrated, leading to different implied hazard rates. The differences in the implied hazard rates are linked to deviations between consensus rating-based hazard rate curves in the two markets, and a residual component related to market frictions. We show that both components diminish over time, but their convergence is asynchronous. A trading strategy based on a joint signal from the curve and residual differences outperforms a conventional trading approach that relies on the absolute differences between the implied hazard rates. Hedge funds are likely to exploit within-market inefficiencies and deviations from rating-based curve, but they do not seem to profit from market segmentation.

AB - Credit default swaps and deep out-of-the-money put options can be used for credit protection, but these markets are not perfectly integrated, leading to different implied hazard rates. The differences in the implied hazard rates are linked to deviations between consensus rating-based hazard rate curves in the two markets, and a residual component related to market frictions. We show that both components diminish over time, but their convergence is asynchronous. A trading strategy based on a joint signal from the curve and residual differences outperforms a conventional trading approach that relies on the absolute differences between the implied hazard rates. Hedge funds are likely to exploit within-market inefficiencies and deviations from rating-based curve, but they do not seem to profit from market segmentation.

KW - Convergence

KW - Credit default swap (CDS)

KW - Deep out-of-the-money put option

KW - Market segmentation

KW - Trading strategy

U2 - 10.1016/j.jempfin.2023.03.008

DO - 10.1016/j.jempfin.2023.03.008

M3 - Journal article

AN - SCOPUS:85150799954

VL - 72

SP - 188

EP - 213

JO - Journal of Empirical Finance

JF - Journal of Empirical Finance

SN - 0927-5398

ER -