Structural Break Analysis of Credit Default Swap Spreads of Companies in India and China

This study examines the presence of structural breaks in credit default swap (CDS) spreads for firms in India and China and their impact on testing market efficiency. While traditional unit root tests and basic forecasting models suggest weak market efficiency in both the Indian and Chinese CDS markets, the presence of structural breaks, primarily related to the onset of the COVID-19 pandemic, introduces an additional layer of complexity. To address this issue, the study used the Bay-Perron test to identify multiple structural breaks and then segmented the data for further analysis. The hypothesis that market inefficiency will be detected if structural breaks are properly taken into account has not been confirmed. Neither unit root tests applied to individual segments nor forecasting models built on segmented data provided evidence to refute the original conclusions about weak-form market efficiency. Our findings, based on CDS spread data for 24 Indian and Chinese companies between 2010 and 2024, contribute to the sparse literature on CDS market efficiency associated with emerging economies and highlight the need for nuanced approaches to assessing market efficiency in the presence of structural factors. This research may be useful to investors, risk managers interested in accurately forecasting credit risk, and policymakers seeking to create an effective regulatory framework for CDS markets.