Short Ban and the Specific Influences on CDS Trading Strategies - An Empirical Analysis -
This thesis focused on researching the impact of short bans on CDS spreads and thus CDS trading strategies. It explained how the initially anticipated positive effects of such short ban policies were adopted by the market and what opportunities this triggered in regard to CDS trading strategies.
Flück David, 2012
Bachelor Thesis, Institute for Finance, School of Business FHNW
Keywords: short ban, CDS spreads, CDS basis trading strategy, CDS curve trading strategy, event study, financial crisis, banking, sovereign debt
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Starting points were the two major short ban events on 19 September 2008 in US with a short ban on financial stocks and 18 October 2011 in Europe with a short ban announcement on sovereign bonds. It was hypothesized that the negative effects of a short ban also significantly distorted CDS spreads and thus triggered higher profit opportunities in CDS basis and curve trading strategies.
The characteristics of single name - and multi name CDS, findings from recent research about short ban implementations and basis- and curve trading strategies were first introduced to get an wholistic picture. It followed an event study to test the significance of abnormal CDS spread changes for a sample in regard to US and Europe. These findings plus a seperate analysis of basis- and curve trading strategies for US and Europe based on CDX- and iTraxx indices then served to draw conclusions about the profitability of opportunities arising out of these trading strategies, due to the short ban.
The results showed that cumulative average abnormal changes in CDS spreads (AR) were not significant for all event windows analyzed in regard to US and Europe. However, remarkable differences for US and Europe were found which indicated that in US, the short ban was highly anticipated in contrast to Europe, where most market activity started on the event date shown by AR1 -25.3% and AR1 -31.1% for US and AR2 7.4% for Europe. This led to the finding that by anticipating, inside information or upon announcement of a short ban, a positive basis trading strategy for one or two days resulted in bigger profits due to tightening CDS spreads. The same conclusion was drawn on curve trading strategies in regard to a curve flattener strategy. However, it was found that the correlation of the analyzed indices also influenced the profitability of the trades remarkably.
Studiengang: Business Administration International Management (Bachelor)
Fachbereich der Arbeit: Accounting, Banking, Controlling and Finance