Portfolio Benefits of Adding Corporate Credit Default Swap Indices: Evidence from North America and Europe
Posted: 21 Sep 2016 Last revised: 8 Apr 2021
Date Written: September 19, 2016
Employing main and sector-speciﬁc CDS indices from the North American and European CDS market and performing mean-variance out-of-sample analyses for conservative and aggressive investors over the period from 2006 to 2014, this paper analyzes portfolio beneﬁts of adding corporate CDS indices to a traditional ﬁnancial portfolio consisting of stock and sovereign bond indices. As a baseline result, we initially ﬁnd an increase in portfolio (downside) risk-diversiﬁcation when adding CDS indices, which is observed irrespective of both CDS markets, investor-types and diﬀerent sub-periods including the global ﬁnancial crisis and European sovereign debt crisis. In addition, the analysis reveals higher portfolio excess returns and performance in CDS index portfolios, however, these eﬀects clearly diﬀer between markets, investor-types and sub-periods. Overall, portfolio beneﬁts of adding CDS indices mainly result from the fact that institutional investors replace sovereign bond indices rather than stock indices by CDS indices due to better risk-return characteristics. Our baseline ﬁndings remain robust under a variety of robustness checks. Results from sensitivity analyses provide further important implications for institutional investors with a strategic focus on a long-term conservative portfolio management.
Keywords: corporate credit default swap indices, mean-variance asset allocation, out-of-sample portfolio optimization, portfolio risk-diversification, portfolio performance evaluation
JEL Classification: C61, G01, G11, G15, G23
Suggested Citation: Suggested Citation