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Publication date: 10 March 2022

Karim Henide

This paper identifies the “idiosyncratic basis”, the residual premia computed from stripping away the hypothetical cross-currency basis (CCB) from the cross-currency credit spread…

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Abstract

This paper identifies the “idiosyncratic basis”, the residual premia computed from stripping away the hypothetical cross-currency basis (CCB) from the cross-currency credit spread (CCCS) of eligible senior corporate dollar-denominated bonds relative to their hypothetical euro-denominated comparator of identical seniority, duration, credit risk and issuer. The adherence of the idiosyncratic basis to the no-arbitrage condition is subsequently evaluated through the application of an indicative market-neutral credit strategy that is designed to harvest the apparent static arbitrage opportunities. The success of the strategy, which systematically captures the idiosyncratic basis as it adheres to the no-arbitrage conditions, is validated retrospectively to frame the basis as an additional class of alternative risk premia (ARP), which investors can seek to optimise exposure to in a long-only context.

Details

Journal of Derivatives and Quantitative Studies: 선물연구, vol. 30 no. 2
Type: Research Article
ISSN: 1229-988X

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