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Applied Economics Letters Volume 16, 2009 - Issue 14
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Original Articles

An empirical analysis of the CDX index and its tranches

Frank J. Fabozzi Journal of Portfolio Management, 858 Tower View Circle, New Hope, PA, 18938, USA; School of Management, Yale University, Box 208200, New Haven, CT, 06520-8200, USACorrespondence[email protected] [email protected]
,
Yi-Chen Wang Department of Money and Banking, National Kaohsiung First University of Science and Technology, 2 Jhuoyue Rd, Nanzih District, Kaohsiung City, 811, Taiwan, Republic of China
,
Shih-Kuo Yeh Department of Finance, National Chung Hsing University, 250, Kuo Kuang Rd, Taichung, 402, Taiwan, Republic of China
&
Ren-Raw Chen Department of Finance, Fordham University, New York, NY 10023, USA
Pages 1425-1431 | Published online: 07 Oct 2009
 
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Abstract

The desire of market participants to go long or short a portfolio of corporate credits led to the introduction of various types of indices of credit default swaps. In this article, we empirically investigate the relationships between the spreads of the North America CDX index and its tranches and their theoretical determinants. We find (1) support for a number of results predicted by the structural models used in credit risk modelling, such as the Merton model and (2) that CDX spreads are highly responsive to microstructure variables but not to macroeconomic variables.

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