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Price convergence between credit default swap and put option: New evidence by Ka Kei Chan; Olga Kolokolova; Ming-Tsung Lin; Ser-Huang Poon is a Economics, Econometrics and Finance article available to read on EtoBox.

What is Price convergence between credit default swap and put option: New evidence about?

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.

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

Author

Ka Kei Chan; Olga Kolokolova; Ming-Tsung Lin; Ser-Huang Poon

Publisher

Elsevier BV

Published

2023

Language

EN

Field

Economics, Econometrics and Finance (Social Sciences)