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The Sovereign CDS-To-Leverage Correlation

Tyler Durden's picture


As more and more of the broad public figures out what this thing called sovereign CDS is, the next logical question (especially for algos and correlation desks) is whether or not sovereign leveraged levels can be gamed, or is there any specific correlation that can be arbed as the dominos start to fall (not everyone has the luxury of printing limitless amount of the world's reserve currency). Below we present a chart correlating the CDS with the Debt to GDP ratios of various indicative countries. The chart excludes the outliers of Argentina, Venezuela and the Ukraine, which even though having less than 100% Debt-to-GDP are all trading 1000 bps and wider.

Is there a correlation here? You decide. The R2 is 0.5143, which probably means that algos will gradually start to flatline the correlation as more and more sovereign CDS-trading players emerge.



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Mon, 12/14/2009 - 11:22 | 163180 trav777
trav777's picture

another gambling vehicle...angels on pinheads next CDS trading underlier

Mon, 12/14/2009 - 12:33 | 163259 Anonymous
Anonymous's picture

You should use NET EXTERNAL debt-to-gdp. Unfortunately, that number is not readily available. BTW, on that basis, Japan is fine.

Mon, 12/14/2009 - 12:35 | 163260 Anonymous
Anonymous's picture

Could you list what countries are on tihs?

Mon, 12/14/2009 - 12:38 | 163266 Anonymous
Anonymous's picture

Not a compelling fit. Remove the two outliers (top right), and a linear regression would slope DOWN (southeast).

Mon, 12/14/2009 - 14:00 | 163377 jd2iv987
jd2iv987's picture

yeah maybe if you are looking in a mirror? was that serious?



Tue, 12/15/2009 - 01:27 | 164212 Anonymous
Anonymous's picture

True, it isn't a good fit. False, a linear regression of this data would have a positive slope, but the correlation coefficient would be no better than 0.5. My calibrated eyeball tells me a log curve would be the best fit, and the correlation coeff. would still be unconvincing.

Mon, 12/14/2009 - 12:58 | 163292 kennard
kennard's picture

You should use NET EXTERNAL debt-to-gdp. That number is not widely available, so it may represent an arbitrage opportunity. For example, Japan looks good by that standard,

Mon, 12/14/2009 - 13:19 | 163308 Chopshop
Chopshop's picture

great note TD ... if it can be arbed its gonna be.  but that does not mean that it will be done well.  and is the strategy even the 'right' one for the issue?

seems to be yet another idea to throw money at which isn't really a great one; but hey, why not, it ain't my/ your money, so ... "jim, whaddya say we ..." 

someone's gonna do it.  just find it so funny how so much actual capital and time duration / commitment / risk is actually arbed instead of just placing a directionally leveraged bet ... call it what it is when you have tenuous relationships, which are much more coincidental and lagging than anything else and anything at all but predictively accurate or actionably timely.

half-assed tongue-in-cheek: does anyone still place predictive bets or is it all just an umpteen stage attempt to synthetically hedge which, um, could work.

Mon, 12/14/2009 - 15:04 | 163465 Joe Sixpack
Joe Sixpack's picture

I see two clumps of data (around 100 bps and 250 bps), and two oultiers (around 525 bps). Given that you already dropped two outliers, I wouldn't even bet FRNs on it.

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