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Suppose I want to perform an event study on corporate CDS spreads using the market model. All my CDS are US dollar-denominated, whereas the market index is euro-denominated. Is this strategy acceptable, or should I use an index to match the currency of securities, such as an equally-weighted portfolio?

Thanks.

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Looking at Markit spreads, when both USD and EUR spreads are published, then usually (not always) either they are exactly the same, or differ only by 1-2%. I think this means that many contributors just submit the same numbers for USD and EUR spreads.

However for a few names the spreads differ a lot, most notably EUR-denominated protection on Italy sovereign has been order of 1/2 of USD-denominated protection, because of the assumption that a credit event would cause EUR to devalue against USD.

I can't think of a corporate name whose credit event would have such a profound impact on EUR (maybe EADS?), but if you can think of one, then you might want to avoid assuming that its USD and EUR spreads are the same.

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  • $\begingroup$ Thanks, Dimitri, for your comments. Basically, I would use the log-change of CDS spreads, and I'm wondering whether this strategy is acceptable in this framework, given the fact that the data is not in levels. The same question can be applied to stock prices, when using a global index for the market portofolio: is the currency of the index relevant if one uses returns, and not prices? $\endgroup$
    – Niqx
    Commented Apr 19, 2020 at 16:52

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