A New Test of Statistical Arbitraje with Applications to Credit Derivatives Markets

52 Pages Posted: 12 Jun 2019

See all articles by Sergio Mayordomo

Sergio Mayordomo

Banco de España

Juan Ignacio Peña

Universidad Carlos III de Madrid - Department of Business Administration

Juan Romo

Universidad Carlos III de Madrid

Date Written: 2011

Abstract

This paper presents a new statistical arbitrage test which has lower Type I error and selects arbitrage opportunities with lower downside risk than existing alternatives. The test is applied to credit derivatives markets using strategies combining Credit Default Swaps and Asset Swaps. Using four different databases (GFI, Reuters, CMA and JP Morgan) from 2005 to 2009, we find persistent mispricings before and dur-ing the current financial crisis. However, after considering funding and trading costs, these mispricings are unlikely to provide profitable arbitrage opportunities.

Keywords: Persistent Mispricings, Credit Derivatives, Credit Spreads, Subsampling

JEL Classification: C12, G12, G14

Suggested Citation

Mayordomo, Sergio and Peña, Juan Ignacio and Romo, Juan, A New Test of Statistical Arbitraje with Applications to Credit Derivatives Markets (2011). CNMV Working Paper No. 47 (2011), Available at SSRN: https://ssrn.com/abstract=3400611

Sergio Mayordomo

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Juan Ignacio Peña (Contact Author)

Universidad Carlos III de Madrid - Department of Business Administration ( email )

Calle Madrid 126
Getafe, Madrid, Madrid 28903
Spain
34 91 624 9625 (Phone)
34 91 624 9608 (Fax)

Juan Romo

Universidad Carlos III de Madrid ( email )

E-28903 Getafe (Madrid)
Spain

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