12 November 2014 by lberuti
Historically the iTraxx Financial Subordinated index family has been fairly heterogeneous because of the coupon discrepancies between series and because of composition discrepancies from one index vintage to the other, which matter all the more when there are only 25 constituents. Nevertheless, all series up to the series 21 have currently one feature in common, they are all expensive compared to their fair value (their risk premium is tighter than the theoretical value computed with their constituents’ risk premia) while iTraxx Financial Sub S22 is cheap. That can be explained by the difference in documentations. Series 22 is fully compliant with the 2014 documentation which includes additional credit events making CDS’ behaviour closer to what takes place in cash, while the previous series are not. Hence, investors have switched their hedges to the current series to take advantage of this new feature, creating in imbalance between on and off the run indices.