New Credit Factors from Markit Create Trading Signals for CDS

May 14, 2012

Markit, a leading, global financial information services company, today announced that it has created a new set of tools to help traders and risk managers identify the correlations between changes in the value of credit default swaps (CDS) and movements in stock and options markets.  The new data service, Markit Credit Factors, will provide customers with the first sentiment signals for CDS produced by an independent financial information firm.

Developed through extensive research by Markit, the Credit Factors can be used in evaluating the expected performance of CDS and include fundamental, technical and macroeconomic-based indicators.  These Factors span nine categories, including measures of relative value, earnings momentum, earnings quality and price momentum.  In total, the Markit Credit Factors library includes more than 80 measures and covers the global universe of more than 1,500 single name CDS. 

Tim Sargent, managing director and head of Markit Data Analytics & Research, said:  “It is exciting for us to extend the sophisticated analytics we developed for equities to fixed income assets like CDS.  While it is intuitive that there are relationships between asset classes, our research behind the new Credit Factors identifies the correlations between equities and CDS.  We think that providing, for the first time, the ability for CDS traders and risk managers to systematically analyse signals from the equity and other markets is a significant advance.”

A seven-year back-test of a trading model that applied Markit’s Credit Factors to selected US high-yield corporates shows a 5.84% average monthly spread change difference between CDS names indicated to widen versus those indicated to tighten.  The research suggests that a CDS portfolio strategy based on the model could have earned 21.15 basis points, per month, on average.

Markit Credit Factors is the first product to be launched by Markit Data Analytics & Research, the business unit formed by Markit after it acquired Quantitative Services Group in November 2011.  

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