CDS vs stock index changes
A post on CDS (credit default swap, also here), which attracted interesting replies. You are welcome to join the discussion.
1. Very interesting feedback from reader “Frank Fong”:
I have done a analysis on the %CDS change and the corresponding country stock index YTD %.
It shows a correlation about -0.27.
Moreover, I use CDS YTD price change to replace %change,
the result shows -0.32.
It may mean that for emerging markets(higher cds price), their sovereign risk is more related to their index return.
2. (Feedback from me) So that is pretty low correlation…
However, I believe that when CDS moves big way (in whatever % change we define), stock index likely moves.
If there exists some consistent lead time move between them (say CDS usually moves big, then stock market moves big the other way), one can be used as “event risk” indicator to the other…
3. Subsequent email feedback from another “reader”:
The cds price does not vary linearly with cds yield. The mechanism calculating CDS yield and stock index yield is similar. I am not suprised to see the correlation btw cds yield and stock index yield is larger in magnitude. The two correlations show roughly the same information in my opinion.
I am more concerned about finding event risk indicator. Events which indicate large CDS movement leads to large market movement are not frequent in occurance over a long period so the statistical result may not be significant in identifying such events. How could you infer such findings?
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