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A Critique of Credit Default Swaps (CDS) Indices

  • Michael I. C. Nwogugu
Chapter

Abstract

While CDS Indices have grown in popularity during then last ten years, there are many structural problems inherent in the associated index calculation methodologies, which create substantial tracking errors. As of 2018, the global CDS market covered notional amounts that exceeded US$50 trillion.

CDS indices are widely used in valuation and risk management around the world; for example, during the Global Financial Crisis (2007–2010) the ABX family of CDS indices and the Markit CDX CDS indices (http://www.markit.com/en/products/data/indices/credit-and-loan-indices/cdx/cdx.page) were used to value a wide range of assets such as MBS and corporate bonds. This chapter explains why CDS Indices are inaccurate and, thus, can cause and/or amplify financial instability and systemic risk.

Keywords

Credit ratings Credit Default Swaps (CDS) Indices Financial stability Systemic risk Economic policy Nonlinear risk Portfolio management Credit chains Hedging 

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Copyright information

© The Author(s) 2018

Authors and Affiliations

  • Michael I. C. Nwogugu
    • 1
  1. 1.EnuguNigeria

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