CDS Returns

Patrick Augustin, Fahad Saleh and Haohua Xu

Journal of Economic Dynamics and Control, 2020, vol. 118, issue C

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.

Keywords: Correlations; Default swaps; Derivatives; Hedge ratios; ISDA; Leverage (search for similar items in EconPapers)
JEL-codes: G12 G13 G32 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:118:y:2020:i:c:s0165188920301457

DOI: 10.1016/j.jedc.2020.103977

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