What Relationships between Commodities and CDS Indices? Evidence from Archimedean Copulas

Abstract

In this paper, we use the copula model so as to compute the Optimal Hedge Ratio. Hedging with OTC markets is probably the most common way of managing risk, and much research has been done within this field. Our investigation contributes to the current literature insofar as we aim to hedge Credit Default Swaps using two major commodities (gold and oil). The data sets are of daily frequency, comprising the period from 06/27/2008 to 02/24/2016 for a total of 1925 observations. These observations were divided into three subsamples: the global financial crisis (06/27/2008 to 12/31/2009), the sovereign debt crisis in Europe (01/04/2010 to 12/31/2012) and the post-crisis period (01/02/2013 to 02/24/2016). Results show that adding gold into the CDSs portfolios may enhance the risk-adjusted performance. In addition, investors should hold gold than oil in order to reduce the risk of their investment.