The CDS market as a predictor: Pointing to heightened interest ahead of market moves |
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28 Apr 2010 |
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This week on the podcast, we speak with Michal Koblas, Head of Quantitative Research for Credit Market Analysis (CMA). Michal discusses unique factors of the CDS market and noted how viewing the activity and communication among CDS traders points to interesting trends before and after the market crisis. Gain access to the CMA white paper. Read our show notes below for more details on our episode. To get our latest podcast episodes on your computer, Smart Phone, or mp3 player, subscribe at www.factset.com/podcast. 1:15 - From 2007 to 2008 the serious problems in credit quality created an increased amount of counterparty risk. 2:20 - The unique property of the CDS market as opposed to, say, the equity derivatives market, is that trading in this market is performed over the counter. Counterparties execute trades directly with each other. 3:15-5:00 - The key challenge of monitoring the CDS market is the lack of insight into price levels. CMA takes advantage of software that tracks the huge amount of over-the-counter orders and quote requests by providing a tool that reads messages for the investors. A consortium of selected investors has agreed to pass some of this information onto CMA. 5:15 - By observing the quoting frequency in the consortiums’ communications, CMA can gain insight into the market's interest in a particular company or credit. 6:30-7:30 - CMA has observed, as highlighted in the white paper, that the CDS market became increasingly volatile during the crisis. 8:45 – One salient example of the insight given by the CDS market is that once HSBC announced subprime losses, market activity surrounding subprime lenders boosted by five-fold. 9:30 - CDS price levels for financials stayed stable for the first six months after HSBC’s announcement, but if you look at how often people started quoting given names, you could gauge a rising level of interest in subprime lenders. 14:10 - A more recent example of CDS market moves ahead of a large change in the market came when Greece was downgraded. With Greece, there was a lot of activity in the weeks before its price of Eurozone credit started moving. 15:15 - An important thing to note is that the CDS market allows you to follow the market's interest in a stock or company. The market may not always be right, but it can signal you to look more closely. 16:30 - Credit ratings are useful, and offer a broader range of information than the CDS market can. However, the timeliness of ratings updates is not as good as the CDS market. |
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