The effect of S&P500 additions and deletions on CDS coverage

Abstract

The risk associated to financial transactions can be divided into two main groups: market risk and credit risk. To this regard, Credit Default Swaps (CDS) are a particular type of credit derivatives that are used to mitigate credit risk and that have for this reason played the role of protagonist in the global economic scenario over the most recent years. Moreover, the Credit Rating Agencies have also played a leading role in the economic system for the last few decades. To this regard, Standard & Poor’s is among the most important and influent Credit Rating Agencies worldwide. This work considers several datasets and data regarding CDS and the S&P500 Index in order to determine the effect of the S&P500 Index additions and deletions on CDS and its characteristics. From the various models and analyses considered it was possible to conclude that the initial hypothesis holds true and therefore that the probability that the companies that are constituents of the S&P500 Index are also reference entities of CDS contracts is higher than the probability that the companies that are not constituents of the S&P500 Index are also reference entities of the CDS contracts; in addition to this, several conclusions regarding specific characteristics of CDS could also be drawn. In conclusion, the various models and analyses that were taken into consideration in this work have thus provided interesting results and insights about CDS and the CDS market.