Excess comovement in credit default swap markets: Evidence from the CDX indices

We provide evidence of excess comovement in the credit default swap (CDS) market following inclusions to and exclusions from investment grade and high yield CDX indices during the 2003–2016 period. We find that when a name joins an index, its return tends to covary more with the returns of that inde...

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Bibliographic Details
Published inJournal of financial markets (Amsterdam, Netherlands) Vol. 43; pp. 96 - 120
Main Authors Cathcart, Lara, El-Jahel, Lina, Evans, Leo, Shi, Yining
Format Journal Article
LanguageEnglish
Published Elsevier B.V 01.03.2019
Subjects
CDX indices
Credit default swaps
Credit ratings
Excess comovement
CDX indices
C20
Excess comovement
Credit ratings
G24
G14
Credit default swaps
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Summary:We provide evidence of excess comovement in the credit default swap (CDS) market following inclusions to and exclusions from investment grade and high yield CDX indices during the 2003–2016 period. We find that when a name joins an index, its return tends to covary more with the returns of that index and conversely when it is excluded from an index, its return tends to covary less with it. We use univariate regressions and a difference-in-difference approach to show that the CDS market is impacted by indexation. This excess comovement indicates a departure from fundamental-based pricing and provides support in favour of style investing. •Excess co-movement in Credit Default Swap spreads.•Departure from fundamentals based price co-movement.•CDS spreads of issuers in investment-grade and high yield CDX indices.
ISSN:1386-4181
1878-576X
DOI:10.1016/j.finmar.2018.10.002