Mispricing and Arbitrage in CDS Auctions

Posted: 27 Jan 2016

See all articles by Sudip Gupta

Sudip Gupta

Johns Hopkins University

Rangarajan K. Sundaram

New York University (NYU) - Department of Finance

Date Written: July 1, 2014


Two recent studies have found that the prices at which CDS auctions clear tend to differ substantially from both pre- and post-auction prices of the underlying bonds in the market. IN particular, CDS "sell" auctions appear to result in systematics underpricing, and CDS "buy" auctions in systematic overpricing, of the bonds relative to market prices. In this article, using data on all auctions up to 2013, the authors confirm that these patterns hold and, indeed, that trading on this apparent mispricing between the market and the auction can generate paper arbitrage profit of 15% or more. They find, however, that these gains largely represent compensation for bearing liquidity risk.

Suggested Citation

Gupta, Sudip and Sundaram, Rangarajan K., Mispricing and Arbitrage in CDS Auctions (July 1, 2014). Journal of Derivatives, Forthcoming, Kelley School of Business Research Paper No. 16-12, Available at SSRN: https://ssrn.com/abstract=2722542

Sudip Gupta (Contact Author)

Johns Hopkins University ( email )

Baltimore, MD 20036-1984
United States

Rangarajan K. Sundaram

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0308 (Phone)
212-995-4233 (Fax)

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