In the study reported, the CreditGrades model was used to calculate credit
default swap spreads and the spreads were compared with empirically observed CDS
spreads for eight iTraxx indices covering Europe. Theoretical and empirical
spread changes were found to be significantly correlated. Also, lagged
theoretical spread changes were correlated with current iTraxx spread changes.
The correlations indicate a close relationship between the stock market and the
CDS market and also indicate some predictive ability of the CreditGrades model.
Simple trading strategies based on the autocorrelation and predictive ability of
the model produced positive profits, before trading costs, when trading was
within the bid–ask spread.