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An empirical analysis of the CDX index and its tranches

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  • Frank Fabozzi
  • Yi-Chen Wang
  • Shih-Kuo Yeh
  • Ren-Raw Chen

Abstract

The desire of market participants to go long or short a portfolio of corporate credits led to the introduction of various types of indices of credit default swaps. In this article, we empirically investigate the relationships between the spreads of the North America CDX index and its tranches and their theoretical determinants. We find (1) support for a number of results predicted by the structural models used in credit risk modelling, such as the Merton model and (2) that CDX spreads are highly responsive to microstructure variables but not to macroeconomic variables.

Suggested Citation

  • Frank Fabozzi & Yi-Chen Wang & Shih-Kuo Yeh & Ren-Raw Chen, 2009. "An empirical analysis of the CDX index and its tranches," Applied Economics Letters, Taylor & Francis Journals, vol. 16(14), pages 1425-1431.
    • Handle: RePEc:taf:apeclt:v:16:y:2009:i:14:p:1425-1431
    DOI: 10.1080/17446540802584889
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    References listed on IDEAS

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    1. Liuren Wu & Frank X. Zhang, 2005. "A no-arbitrage analysis of economic determinants of the credit spread term structure," Finance and Economics Discussion Series 2005-59, Board of Governors of the Federal Reserve System (U.S.).
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    Cited by:

    1. Marra, Miriam, 2015. "The impact of liquidity on senior credit index spreads during the subprime crisis," International Review of Financial Analysis, Elsevier, vol. 37(C), pages 148-167.
    2. Ballestra, Luca Vincenzo & Pacelli, Graziella, 2014. "Valuing risky debt: A new model combining structural information with the reduced-form approach," Insurance: Mathematics and Economics, Elsevier, vol. 55(C), pages 261-271.

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