Please use this identifier to cite or link to this item: https://hdl.handle.net/20.500.14279/14680
Title: Dependence in credit default swap and equity markets: Dynamic copula with Markov-switching
Authors: Fei, Fei 
Fuertes, Ana Maria 
Kalotychou, Elena 
Major Field of Science: Social Sciences
Field Category: Economics and Business
Keywords: Value-at-Risk;Copula;Credit spread;Dependence;Regime switching;Tail dependence
Issue Date: 1-Jul-2017
Source: International Journal of Forecasting, 2017, vol. 33, no. 3, pp. 662-678
Volume: 33
Issue: 3
Start page: 662
End page: 678
Journal: International Journal of Forecasting 
Abstract: © 2017 International Institute of Forecasters Theoretical credit risk models à la Merton (1974) predict a non-linear negative link between the default likelihood and asset value of a firm. This motivates us to propose a flexible empirical Markov-switching bivariate copula that allows for distinct time-varying dependence between credit default swap (CDS) spreads and equity prices in “crisis” and “tranquil” periods. The model identifies high-dependence regimes that coincide with the recent credit crunch and the European sovereign debt crises, and is supported by in-sample goodness-of-fit criteria relative to nested copula models that impose within-regime constant dependence or no regime-switching. Value-at-Risk forecasts that aim to set day-ahead trading limits for the hedging of CDS-equity portfolios reveal the economic relevance of the model from the viewpoints of both regulatory and asymmetric piecewise linear loss functions.
URI: https://hdl.handle.net/20.500.14279/14680
ISSN: 01692070
DOI: 10.1016/j.ijforecast.2017.01.006
Rights: © Elsevier
Type: Article
Affiliation : City University London 
Cyprus University of Technology 
Publication Type: Peer Reviewed
Appears in Collections:Άρθρα/Articles

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