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CDS Returns

Author

Listed:
  • Augustin, Patrick
  • Saleh, Fahad
  • Xu, Haohua

Abstract

We show that existing metrics of CDS returns poorly approximate cash flow-based CDS returns. Given the complexities involved in computing CDS returns correctly, we provide a simple closed-form approximation that bears a correlation of no less than 99% with the true return series. Our work emphasizes the importance of distinguishing between changes in credit spreads and CDS returns. In addition, it highlights the need to rely on true CDS return metrics to evaluate investment strategies and predictive return regressions that involve the selling or buying of CDS contracts.

Suggested Citation

  • Augustin, Patrick & Saleh, Fahad & Xu, Haohua, 2020. "CDS Returns," Journal of Economic Dynamics and Control, Elsevier, vol. 118(C).
    • Handle: RePEc:eee:dyncon:v:118:y:2020:i:c:s0165188920301457
    DOI: 10.1016/j.jedc.2020.103977
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    References listed on IDEAS

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    More about this item

    Keywords

    Correlations; Default swaps; Derivatives; Hedge ratios; ISDA; Leverage;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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