Hedging iTraxx CDS Index Trading on an Intraday Basis: An Empirical Study

Abstract

In this paper we examine the effectiveness of intraday hedging models for CDS index trading by means of more liquidly traded exchange-based future contracts. We consider the equity and BUND future as financial instruments to hedge standard 5Y iTraxx Euro Main and Crossover indices. Our analysis is based on a 4-month intraday time series for traded prices and quoted spreads, respectively. We find that a DAX future based intraday hedging strategy is the most efficient one. While the cross-asset hedging strategy reduces the intraday market risks of iTraxx Euro positions, the overall hedging efficiency is limited.

Keywords: intraday hedging, CDS index

JEL Classification: C31, G14