Healthy... Distress... Default

Journal of Risk & Control 6(1) (2019) 113-119, Invited Editorial

6 Pages Posted: 4 Sep 2019 Last revised: 6 Oct 2019

See all articles by Zura Kakushadze

Zura Kakushadze

Quantigic Solutions LLC; Free University of Tbilisi

Date Written: June 4, 2019


We discuss a simple, exactly solvable model of stochastic stock dynamics that incorporates regime switching between healthy and distressed regimes. Using this model, which is analytically tractable, we discuss a way of extracting expected returns for stocks from realized CDS spreads, essentially, the CDS market sentiment about future stock returns. This alpha/signal could be useful in a cross-sectional (statistical arbitrage) context for equities trading.

Keywords: stock, credit default swap, CDS spread, healthy, distress, default, stochastic dynamics, statistical arbitrage, alpha, regime switching, expected return, market sentiment, equities trading, probability of default, drift, regression, Brownian motion, trading signal, transition density, recovery rate

JEL Classification: G00, G10, G11, G12, G13, G20, G23, G24, G30, G32, G33, C22

Suggested Citation

Kakushadze, Zura, Healthy... Distress... Default (June 4, 2019). Journal of Risk & Control 6(1) (2019) 113-119, Invited Editorial, Available at SSRN:

Zura Kakushadze (Contact Author)

Quantigic Solutions LLC ( email )

680 E Main St #543
Stamford, CT 06901
United States
6462210440 (Phone)
6467923264 (Fax)


Free University of Tbilisi ( email )

Business School and School of Physics
240, David Agmashenebeli Alley
Tbilisi, 0159

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