Currency Choice for CDS Event-Study Market Indices

Summary

The document considers whether a market index in euros is appropriate for a market-model event study of corporate credit default swap spreads quoted in US dollars. Its answer suggests that published dollar and euro spreads are often identical or close for many names, which may indicate that contributors report similar values across currencies. However, this does not hold universally.

The example of Italian sovereign credit protection illustrates why currency denomination can matter: euro and dollar spreads may differ substantially because the assumed credit-event outcome could affect the euro’s value against the dollar. For ordinary corporate issuers, the answer sees fewer cases where such an effect would be expected, but flags that an issuer with a material currency impact could make the mismatch consequential. The discussion is qualitative and offers no formal test for index selection; analysts should consider the issuer’s credit-event and currency exposure when deciding whether to use a same-currency benchmark.

Key ideas

• A market index in a different currency may still be usable when CDS spreads across currencies are similar.
• Currency denomination can produce large spread differences when a credit event may affect exchange rates.
• Issuer-specific currency exposure should inform benchmark choice in an event study.
• The answer is qualitative and does not establish a general rule for matching index currency.

Tags

# Currency-denomination for the index in an event study


# Currency-denomination for the index in an event study












Suppose I want to perform an event study on corporate CDS spreads using the market model. All my CDS are US dollar-denominated, whereas the market index is euro-denominated. Is this strategy acceptable, or should I use an index to match the currency of securities, such as an equally-weighted portfolio?

Thanks.

## Answer by Dimitri Vulis (score 1)

https://quant.stackexchange.com/a/53419

Looking at Markit spreads, when both USD and EUR spreads are published, then usually (not always) either they are exactly the same, or differ only by 1-2%. I think this means that many contributors just submit the same numbers for USD and EUR spreads.

However for a few names the spreads differ a lot, most notably EUR-denominated protection on Italy sovereign has been order of 1/2 of USD-denominated protection, because of the assumption that a credit event would cause EUR to devalue against USD.

I can't think of a corporate name whose credit event would have such a profound impact on EUR (maybe EADS?), but if you can think of one, then you might want to avoid assuming that its USD and EUR spreads are the same.

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