This paper estimates recent default risk premia for U.S. corporate debt, based on a close relationship between default probabilities, as estimated by Moody's KMV EDFs, and default swap (CDS) market rates. The default-swap data, obtained through CIBC from 22 banks and specialty dealers, allow us to establish a strong link between actual and risk-neutral default probabilities for the 69 firms in the three sectors that we analyze: broadcasting and entertainment, healthcare, and oil and gas. We find dramatic variation over time in risk premia, from peaks in the thrid quarter of 2002, dropping by roughly 50% to late 2003.

This paper analyzes possible arbitrage opportunities in credit derivatives markets using self-…nancing strategies combining Credit Default Swaps and Asset Swaps Packages. We present a new statistical arbitrage test based on the subsampling methodology which has lower Type I error and selects arbitrage opportunities with lower downside risk than existing alternatives. Using four di¤erent databases covering the period from 2005 to 2009, long-run (cointegration) and statistical arbitrage analysis are performed. Before the subprime crisis, we …nd long-run arbitrage opportunities in 27 % of the cases and statistical arbitrage opportunities in 29 % of the cases. During the crisis, arbitrage opportunities decrease to 9 % and 17%, respectively. After considering funding and trading costs, we …nd statistical arbitrage opportunities in 16 % of the cases before the crisis but never during the crisis. Arbitrage opportunities are more frequent in the case of relatively low rated bonds.

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