Portfolio Benefits of Adding Corporate Credit Default Swap Indices: Evidence from North America and Europe

Posted: 21 Sep 2016 Last revised: 8 Apr 2021

See all articles by Benjamin Hippert

Benjamin Hippert

BaFin- Federal Financial Supervisory Authority

André Uhde

University of Paderborn - Faculty of Business Administration and Economics - Department of Taxation, Accounting & Finance

Sascha Tobias Wengerek

Paderborn University - Faculty of Business Administration and Economics - Department of Taxation, Accounting & Finance

Date Written: September 19, 2016

Abstract

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

Hippert, Benjamin and Uhde, André and Wengerek, Sascha Tobias, Portfolio Benefits of Adding Corporate Credit Default Swap Indices: Evidence from North America and Europe (September 19, 2016). Review of Derivatives Research, July 2019, Volume 22, Issue 2, pp 203-259, Available at SSRN: https://ssrn.com/abstract=2841261

Benjamin Hippert

BaFin- Federal Financial Supervisory Authority ( email )

Graurheindorfer Str. 108
Bonn, 53117
Germany

André Uhde

University of Paderborn - Faculty of Business Administration and Economics - Department of Taxation, Accounting & Finance ( email )

Warburger Str. 100
D-33098 Paderborn
Germany

Sascha Tobias Wengerek (Contact Author)

Paderborn University - Faculty of Business Administration and Economics - Department of Taxation, Accounting & Finance ( email )

Warburger Str. 100
Paderborn, D-33098
Germany

HOME PAGE: http://www.upb.de/finance

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