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The Effects of Entering and Exiting a Credit Default Swap Index

Author

Listed:
  • Jennie Bai
  • Or Shachar

Abstract

Since their inception in 2002, credit default swap (CDS) indexes have gained tremendous popularity and become leading barometers of the credit market. Today, investors who want to hedge credit risk or to speculate can choose from a broad menu of indexes that offer protection against the default of a firm, a European sovereign, or a U.S. municipality, among others. The major CDS indexes in the U.S. are the CDX.NA.IG and the CDX.NA.HY, composed of North American investment-grade (IG) and high-yield (HY) issuers, respectively. In this post, we focus on the CDX.NA.IG index. We discuss the interplay between the index and its constituents, specifically the ?roll? process of the index, when irrelevant constituents are replaced by new ones. Analyzing the relation between the CDX.NA.IG index and its constituents in the context of the roll process allows us to gain a better understanding of how the exit of dealers from the single-name CDS market might affect pricing dynamics in the CDS market as a whole.

Suggested Citation

  • Jennie Bai & Or Shachar, 2015. "The Effects of Entering and Exiting a Credit Default Swap Index," Liberty Street Economics 20150330, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednls:87019
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    File URL: https://libertystreeteconomics.newyorkfed.org/2015/03/the-effects-of-entering-and-exiting-a-credit-default-swap-index.html
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    Cited by:

    1. Nina Boyarchenko & Anna M. Costello & Or Shachar, 2020. "The Long and Short of It: The Post-Crisis Corporate CDS Market," Economic Policy Review, Federal Reserve Bank of New York, vol. 26(3), pages 1-49, June.

    More about this item

    Keywords

    Volcker Rule; Basel III; basis; Dodd Frank; CDX Index; roll;

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets

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