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The Correlation Structure of the CDS Market: An Empirical Investigation

Using an extensive data set of credit default swap (CDS) spreads on U.S. firms, we investigate the correlation structure of the CDS market. For comparison, we also examine the correlation structure of their equity returns. We find that although industry affiliation plays a central role in CDS correlations, so too does rating classification above and below investment grade. By contrast, the correlation structure of equity returns is characterized by industry affiliation. Our results highlight differences in the organization of these markets and the salience of the investment-grade boundary.