Arbitrage Opportunities in CDS Term Structure: Theory and Implications for OTC Derivatives

R. Brummelhuis, Zhongmin Luo
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引用次数: 2

Abstract

Absence-of-Arbitrage (AoA) is the basic assumption underpinning derivatives pricing theory. As part of the OTC derivatives market, the CDS market not only provides a vehicle for participants to hedge and speculate on the default risks of corporate and sovereign entities, it also reveals important market-implied default-risk information concerning the counterparties with which financial institutions trade, and for which these financial institutions have to calculate various valuation adjustments (collectively referred to as XVA) as part of their pricing and risk management of OTC derivatives, to account for counterparty default risks. In this study, we derive No-arbitrage conditions for CDS term structures, first in a positive interest rate environment and then in an arbitrary one. Using an extensive CDS dataset which covers the 2007-09 financial crisis, we present a catalogue of 2,416 pairs of anomalous CDS contracts which violate the above conditions. Finally, we show in an example that such anomalies in the CDS term structure can lead to persistent arbitrage profits and to nonsensical default probabilities. The paper is a first systematic study on CDS-term-structure arbitrage providing model-free AoA conditions supported by ample empirical evidence.
CDS期限结构中的套利机会:理论及其对场外衍生品的影响
无套利(AoA)是衍生品定价理论的基本假设。作为场外衍生品市场的一部分,CDS市场不仅为参与者提供了对冲和投机公司和主权实体违约风险的工具,而且还揭示了与金融机构交易的对手方有关的重要市场隐含违约风险信息。为此,这些金融机构必须计算各种估值调整(统称为XVA),作为OTC衍生品定价和风险管理的一部分,以考虑交易对手违约风险。在本研究中,我们推导了CDS期限结构的无套利条件,首先是在正利率环境下,然后是在任意利率环境下。使用涵盖2007-09年金融危机的广泛CDS数据集,我们提出了违反上述条件的2,416对异常CDS合约的目录。最后,我们通过一个例子表明,CDS期限结构中的这种异常可能导致持续套利利润和荒谬的违约概率。本文首次对cds期限结构套利进行了系统研究,提供了无模型AoA条件,并得到了充分的实证支持。
本文章由计算机程序翻译,如有差异,请以英文原文为准。
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