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CMCDS Premia Implicit In The Term Structure Of Corporate CDS Spreads

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Executive Summary

Credit default risk for an obligor can be hedged away with either a Credit Default Swap (CDS) contract or a Constant Maturity Credit Default Swap (CMCDS) con-tract. An investor should be indifferent to the instrument used since both cover the same risk with identical payoffs. On a large universe of obligors, the authors find strong evidence that there is persistent difference in the hedging cost associated with the two comparable contracts. Between 2001 and 2006 it would have been more profitable to sell CDS and buy CMCDS. In addition, the implied forward CDS rates are unbiased estimates of the future spot CDS rates.

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