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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