THE FRACTAL STRUCTURE OF CDS SPREADS: EVIDENCE FROM THE OECD COUNTRIES

Abstract

There is a large and growing literature that criticizes the random walk assumption of the Gaussian distribution and the Efficient Market Hypothesis (EMH) as well. In this respect, the Fractal Market Hypothesis (FMH) is an alternative approach to the EMH. On the other hand, Credit Default Swaps (CDSs) are also taken as an indicator of risk. It is a puzzle for the researchers whether CDS spreads are following a random walk process or not. The aim of this study is to investigate the validity of the FMH in CDS spreads for 34 OECD countries between March 2003 and February 2020. The rescaled range analysis is used for each country’s data with four different frequencies. The results show that there is a persistency in all CDS spreads. That process, called the Hurst process, indicates that the Fractal Market Hypothesis is valid in the CDS spreads. © 2022, Institute for Economic Forecasting. All rights reserved.