Healthy. . .Distress. . . Default

We discuss a simple, exactly solvable model of stochastic stock dynamics that incorporates regime switching between healthy and distressed regimes. Using this model, which is analytically tractable, we discuss a way of extracting expected returns for stocks from realized CDS spreads, essentially, th...

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Bibliographic Details
Published in:Journal of Risk and Control 2019-01, Vol.6 (1)
Main Author: Zura Kakushadze
Format: Article
Language:English
Online Access:Get full text
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Summary:We discuss a simple, exactly solvable model of stochastic stock dynamics that incorporates regime switching between healthy and distressed regimes. Using this model, which is analytically tractable, we discuss a way of extracting expected returns for stocks from realized CDS spreads, essentially, the CDS market sentiment about future stock returns. This alpha/signal could be useful in a cross-sectional (statistical arbitrage) context for equities trading.
ISSN:2056-3701
2056-371X