A Note on CDS Returns

25 Pages Posted: 13 Jun 2017

See all articles by Patrick Augustin

Patrick Augustin

McGill University, Desautels Faculty of Management

Fahad Saleh

McGill University - Desautels Faculty of Management

Date Written: June 12, 2017

Abstract

We show that commonly used metrics of CDS returns poorly approximate cash-flow-based CDS returns, and that they may erroneously represent the relationship between changes in prices of equity and bonds. 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, Credit Default Swaps, Derivatives, Hedge Ratios, ISDA

JEL Classification: G12, G13, G32

Suggested Citation

Augustin, Patrick and Saleh, Fahad, A Note on CDS Returns (June 12, 2017). Available at SSRN: https://ssrn.com/abstract=2985213 or http://dx.doi.org/10.2139/ssrn.2985213

Patrick Augustin

McGill University, Desautels Faculty of Management ( email )

1001 Sherbrooke Street West
Quebec
Montreal, Quebec H3A 1G5
Canada

HOME PAGE: http://www.patrickaugustin.se

Fahad Saleh (Contact Author)

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

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