Are Credit Default Swap Spreads Market Driven

by Hayette Gatfaoui of Rouen School of Management

July 2007

Abstract: We focus on the link prevailing between credit default swap spreads and the U.S. financial market. We apply the Flexible Least Squares regression method to investigate the relationship between CDX spreads and Dow Jones Composite index return. We care about bad scenarii where a decrease in the U.S. market index triggers an increase in CDX spreads…

JEL Classification: C22, G12.

Keywords: Correlation risk, credit risk, flexible least squares regression, market.

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