Zura Kakushadze

Correspondence: Zura Kakushadze , zura@quantigic.com

Quantigic Solutions LLC, USA

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Abstract

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.

Keywords:

  stock; CDS spread; healthy; distress; default; stochastic dynamics; statistical arbitrage; alpha; regime switching; expected return; market sentiment; equities trading

References

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