Publication

  1. Augustin P., F. Saleh, and H. Xu (2020), CDS Returns, Journal of Economic Dynamics and Control, 118

  • We show that existing metrics of CDS returns poorly approximate cash flow-based CDS returns. Given the complexities involved in computing CDS returns correctly, we provide a simple closed-form approximation that bears a correlation of no less than 99% with the true return series. Our work emphasizes the importance of distinguishing between changes in credit spreads and CDS returns. In addition, it highlights the need to rely on true CDS return metrics to evaluate investment strategies and predictive return regressions that involve the selling or buying of CDS contracts.


Working Papers

  1. “Are Option and CDS Markets Integrated?” – Job Market Paper

  • Winner of the 2021 BME Award to the Best Paper on Derivatives Markets presented at the 28th Finance Forum of the Spanish Finance Association (AEFIN)

  • Semi-finalist for the 2021 FMA Annual Meeting best paper awards

  • An increasing number of studies extract credit spreads using equity options data. This inference relies on the assumption that option and credit markets are integrated. I empirically test this assumption using firm level option implied credit spreads (IS) and CDS spreads. While the IS and CDS spreads are cointegrated, suggesting that they converge to an equilibrium relation in the long run, I find significant short-lived price discrepancies. These price discrepancies are closely associated with variables related to limits to arbitrage, such as illiquidity, idiosyncratic risk, institutional ownership, and analyst coverage, as well as the health of financial intermediaries. I provide a stylized asset pricing framework with an intermediary constraint, which can rationalize the salient features of the empirical evidence.

  1. “Why does the CDS Term Structure Predict Equity Returns” with Patrick Augustin and Jan Ericsson (draft available upon request)

    • Previous literature finds conflicting evidence on the predictability between the equity and credit markets by only focusing on the level of the credit spread. This inference omits significant information embedded in the credit spread term structure. We revisit this predictability using the credit spread term structure and find that the term structure of the credit spreads significantly predicts equity returns conditional on the credit spread level. A stylized structural credit risk framework demonstrates that the shape of the term structure contains useful information on the leverage and asset volatility of the firm. These components are associated with the equity beta and asset risk premium embedded in the equity risk premium.


Work in Progress

  1. "Systemic Risk, CDS Market Interconnectedness, and Asset Prices"

    • This paper studies the systemic risk coming from the interconnectedness of the CDS market due to bilateral clearing. I find that this systemic risk is priced in all asset classes, including, equity, bonds, fx, commodity, options, etc.

  2. “Multi-currency Corporate Credit Default Swap Spread Differences”

    • This paper documents the determinants of the Quanto CDS spreads.


Pre-Ph.D. Publications (Chinese)

  1. Haohua Xu1, Haifeng Gu2, Stock Index Futures Short-term Prediction Modelling Based on Difference BP Neural Network, Finance Teaching and Research, 2014, 03:27-32.

  • This paper divides a short-term price prediction based on 2 steps. The first step predicts the magnitude of the price variation via machine learning. The second step predicts the direction of the price movement by examining the dominant curve topological structures of the time series. This paper offers an empirical analysis of Chinese stock index futures market and proves the accuracy of this method.

  1. Haohua Xu­1, Haifeng Gu2, Study on Stock Index Futures Long-term Price from High to Low Point Prediction Model Based on Grey Correlation – Empirical Analysis from HS300 Stock Index Futures, Finance Teaching and Research, 2014, 05:53-58+76.

  • This paper provides an innovative indicator for long term investment in the Chinese stock index futures market using Grey Method. This indicator reflects the peaks and troughs of the futures price time series. An empirical analysis of Chinese HS300 SPIF market demonstrates the usefulness of the indicator.