Trading strategy exploits mispricing in CDS spreads, yielding abnormally large returns.
The article explores mispricing in credit default swaps (CDS) spreads of North American companies using a model of credit risk. A trading strategy based on the model shows abnormally large returns, indicating the presence of mispricing. The strategy's returns are higher when the market is more volatile, suggesting that mispricing is more pronounced during market fluctuations. The strategy also demonstrates significant economic value even after accounting for transaction costs.