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Arbitrage Opportunities in CDS Term Structure: Theory and Implications for OTC Derivatives
As part of the OTC derivatives market, the CDS market not only provides a vehicle for participants to hedge and speculate on the default risks of corporate and sovereign entities, it also reveals important market-implied default-risk information concerning the counterparties with which financial institutions trade, and for which these financial institutions have to calculate various valuation adjustments (collectively referred to as XVA) as part of their pricing and risk management of OTC derivatives, to account for counterparty default risks.
CDS Rate Construction Methods by Machine Learning Techniques
Existing methods cannot account for counterparty-specific default risks; we propose to construct proxy CDS rates by associating to illiquid counterparty liquid CDS Proxy based on Machine Learning Techniques.
