CreditGrades and the iTraxx CDS index market

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50 Citations (SciVal)

Abstract

In the study reported, the CreditGrades model was used to calculate credit default swap spreads and the spreads were compared with empirically observed CDS spreads for eight iTraxx indices covering Europe. Theoretical and empirical spread changes were found to be significantly correlated. Also, lagged theoretical spread changes were correlated with current iTraxx spread changes. The correlations indicate a close relationship between the stock market and the CDS market and also indicate some predictive ability of the CreditGrades model. Simple trading strategies based on the autocorrelation and predictive ability of the model produced positive profits, before trading costs, when trading was within the bid-ask spread.
Original languageEnglish
Pages (from-to)65-76
JournalFinancial Analysts Journal
Volume62
Issue number6
DOIs
Publication statusPublished - 2006

Subject classification (UKÄ)

  • Economics

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