The hedge effectiveness of the credit default swap (CDS) indices is analyzed. Starting with the CDS eligible for inclusion in the indices, CDX.NA.IG, CDX.NA.HY, iTraxx Europe and iTraxx Xover, a credit portfolio construction algorithm is proposed. It is based on principal components for variable...

Which markets do institutions use to change exposure to credit risk? Using a unique data set of transactions in corporate bonds and credit default swaps (CDS) by large financial institutions, we show that simultaneous transactions in both markets are rare, with an average institution having an...

This study examines the potential risk reducing benefits of credit default swaps (CDS) against risk in U.S. stock market sectors from 2004-2011. Tests of GARCH dynamic conditional correlation coefficients indicate that CDS serve as an effective hedge against risk in all stock sectors. CDS also...

This paper provides initial evidence on counterparty risk-mitigation activities of financial institutions on the basis of Depository Trust and Clearing Corporation's (DTCC) proprietary bilateral credit default swap transactions and positions. We show that financial institutions that are active...

With the recent development of the European debt crisis, traditional index bond management has been severely called into question. We focus here on the risk issues raised by the classical market-capitalization weighting scheme. We propose an approach to properly measure sovereign credit risk in...

This study investigates the tail dependence structures of sovereign credit default swaps (CDSs) and three global risk factors in BRICS countries using a copula approach, which is popular for capturing the “true” tail dependence based on the “distribution-adjusted” joint marginals. The...

In this study, the authors shed light upon the nature and degree of market risk inherent in CDS instruments, and consequently offer suggestions to the regulators with regard to the level of regulatory reserves that ought to be mandated to avert extreme disasters or meltdowns in the future. If...

We show that the cross-autocorrelation also exists in the global CDS markets and develop an econometric model to capture the global correlation structure. We study implications on the credit risk transmission and contagion risk. We find four main results: (i) credit risk transmission is through...