CMCDS Premia Implicit in the Term Structure of Corporate CDS Spreads

48 Pages Posted: 14 Oct 2008 Last revised: 1 Oct 2020

See all articles by Arturo Leccadito

Arturo Leccadito

Università degli Studi della Calabria

Radu Tunaru

University of Sussex

Giovanni Urga

Centre for Econometric Analysis, Faculty of Finance, Bayes Business School (formerly Cass), London, UK

Date Written: October 12, 2008

Abstract

Credit default risk for an obligor can be hedged away with either a credit default swap (CDS) contract or the alternative constant maturity credit default swap contract (CMCDS). An economic agent should be indifferent to which instrument is used since both cover the same risk with identical payoffs. On a large universe of obligors we find strong evidence that there is persistent difference in the hedging premia carried by the two comparable contracts. It appears that, in general, it is more profitable to sell CDS and buy CMCDS. In addition, as expected, the implied forward CDS rates are not an unbiased estimate of the future spot CDS rates.

Keywords: Constant Maturity Credit Default Swaps, Forward Credit Rates, Convexity Adjustment, Forward Rate Unbiasedness Hypothesis

Suggested Citation

Leccadito, Arturo and Tunaru, Radu and Urga, Giovanni, CMCDS Premia Implicit in the Term Structure of Corporate CDS Spreads (October 12, 2008). AFFI/EUROFIDAI, Paris December 2008 Finance International Meeting AFFI - EUROFIDAI , Available at SSRN: https://ssrn.com/abstract=1283183 or http://dx.doi.org/10.2139/ssrn.1283183

Arturo Leccadito

Università degli Studi della Calabria ( email )

Ponte Bucci, Cubo 3C
Rende, Cosenza 87036
Italy

Radu Tunaru (Contact Author)

University of Sussex ( email )

Jubilee
Brighton, BN1 9SL
United Kingdom

Giovanni Urga

Centre for Econometric Analysis, Faculty of Finance, Bayes Business School (formerly Cass), London, UK ( email )

108 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 20 7040 8698 (Phone)
+44 20 7040 8881 (Fax)

HOME PAGE: http://www.bayes.city.ac.uk/faculties-and-research/experts/giovanni-urga

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