how to improve quality while editing video captured through CamStudio?
Most likely, the jerkiness is just your system being overloaded.  Many screen capture programs record relatively large files to avoid loading the CPU while capturing, but this means that the data rates needed for playback can be very high and thus can result in problems with reading the data fast enough to keep up with playback.

As far as the degradation, without a sample of what the degradation looks like, it's hard to tell.  The preview may simply be reduced quality to help with the load.  Also, a final output is going to be slightly lower quality as more thorough compression is probably applied by default and any lossy recompression is going to result in further quality loss, though choosing good compression options should minimize the level of loss.

You can try re-compressing the video from the screen capture and it will likely improve performance, but it will also degrade the quality of the final output.  Alternately, you could use a better NLE (non-linear editor) that might handle it more smoothly through better buffering or graphics card acceleration, but most likely you'll want faster hard drives or more memory to work from if you want to maintain the best quality and smoothest editing experience.