Stock Selection via CDS Marks: From Early Warning to Risk Premium

This report revisits J.P. Morgan's 2012 study on extracting information from single-name CDS markets and implementing equity strategies in more liquid, scalable and easier-to-short stock markets. The rapid AI buildout and hyperscalers' debt expansion have renewed focus on credit markets, where CDS may provide an asymmetric informational edge by detecting early going-concern risk and cash-flow deterioration. Using a dataset built from J.P. Morgan trader marks and refined by Credit Research, we find that simple contrarian trades buying the riskiest cohort and selling the least risky cohort deliver underwhelming Sharpe ratios and strong exposures to Beta, Value and Low Quality. Change-based signals are more promising, but the lookback window is critical: short-term spread widening or curve steepening supports a confirmation/short-risk strategy, while longer-term changes support a contrarian/long-risk strategy. Blending the opposing signals into a short-term trend/long-term reversal strate