Advanced Search
MyIDEAS: Login

Modeling the dependence structure between default risk premium, equity return volatility and the jump risk: Evidence from a financial crisis

Contents:

Author Info

  • Naifar, Nader
Registered author(s):

    Abstract

    This paper investigates the dependence structure between default risk premium, equity return volatility and jump risk in the equity market before and during the subprime crisis. Using iTraxx CDS index spreads from Japanese and Australian markets, the paper models the different relationships that can exist in different ranges of behavior. We consider several Archimedean copula models with different tail dependence structures, namely, Gumbel, Clayton, Frank, AMH and Joe copulas. Although the dramatic change in the levels of the iTraxx CDS index, we find strong evidence that the dependence structure between CDS and stock market conditions is asymmetric and orienting toward the upper side. In addition, we find that the Japanese CDS market is more sensitive to the stock return volatility than the jump risk and the magnitude of this sensitivity is related to the market circumstances. However, Australian CDS market is more sensitive to the jump risk than stock return volatility before and during the financial crisis. This result has important implications for both global financial stability and default risk management. Specifically, the heterogeneity of markets, coupled with the diversity in the risk exposures cause the default risk premium and equity markets to exhibit different levels of sensitivity.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.sciencedirect.com/science/article/pii/S0264999311002185
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Bibliographic Info

    Article provided by Elsevier in its journal Economic Modelling.

    Volume (Year): 29 (2012)
    Issue (Month): 2 ()
    Pages: 119-131

    as in new window
    Handle: RePEc:eee:ecmode:v:29:y:2012:i:2:p:119-131

    Contact details of provider:
    Web page: http://www.elsevier.com/locate/inca/30411

    Related research

    Keywords: Nonlinear dynamics; Archimedean copulas; Subprime crisis; Credit default swap; iTraxx CDS index; Equity return volatility; Kurtosis of equity return distribution;

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Dooley, Michael & Hutchison, Michael, 2009. "Transmission of the U.S. subprime crisis to emerging markets: Evidence on the decoupling-recoupling hypothesis," Journal of International Money and Finance, Elsevier, vol. 28(8), pages 1331-1349, December.
    2. Forte, Santiago & Peña, Juan Ignacio, 2009. "Credit spreads: An empirical analysis on the informational content of stocks, bonds, and CDS," Journal of Banking & Finance, Elsevier, vol. 33(11), pages 2013-2025, November.
    3. Ericsson, Jan & Jacobs, Kris & Oviedo, Rodolfo, 2009. "The Determinants of Credit Default Swap Premia," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(01), pages 109-132, February.
    4. Acharya, Viral V & Johnson, Tim, 2005. "Insider Trading in Credit Derivatives," CEPR Discussion Papers 5180, C.E.P.R. Discussion Papers.
    5. Ser-Huang Poon, 2004. "Extreme Value Dependence in Financial Markets: Diagnostics, Models, and Financial Implications," Review of Financial Studies, Society for Financial Studies, vol. 17(2), pages 581-610.
    6. Fratzscher, Marcel, 2009. "What explains global exchange rate movements during the financial crisis?," Working Paper Series 1060, European Central Bank.
    7. Drost, F.C. & Nijman, T.E. & Werker, B.J.M., 1994. "Estimation and testing in models containing both jumps and conditional heteroskedasticity," Discussion Paper 1994-105, Tilburg University, Center for Economic Research.
    8. Tang, Dragon Yongjun & Yan, Hong, 2008. "Market conditions, default risk and credit spreads," Discussion Paper Series 2: Banking and Financial Studies 2008,08, Deutsche Bundesbank, Research Centre.
    9. Fathi Abid & Nader Naifar, 2006. "Credit-default swap rates and equity volatility: a nonlinear relationship," Journal of Risk Finance, Emerald Group Publishing, vol. 7(4), pages 348-371, August.
    10. Donald W.K. Andrews & Werner Ploberger, 1992. "Optimal Tests When a Nuisance Parameter Is Present Only Under the Alternative," Cowles Foundation Discussion Papers 1015, Cowles Foundation for Research in Economics, Yale University.
    11. Coudert, Virginie & Gex, Mathieu, 2010. "Contagion inside the credit default swaps market: The case of the GM and Ford crisis in 2005," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 20(2), pages 109-134, April.
    12. Ackermann, Josef, 2008. "The subprime crisis and its consequences," Journal of Financial Stability, Elsevier, vol. 4(4), pages 329-337, December.
    13. Pierre Collin-Dufresne, 2001. "The Determinants of Credit Spread Changes," Journal of Finance, American Finance Association, vol. 56(6), pages 2177-2207, December.
    14. Benjamin Yibin Zhang & Hao Zhou & Haibin Zhu, 2005. "Explaining credit default swap spreads with the equity volatility and jump risks of individual firms," Finance and Economics Discussion Series 2005-63, Board of Governors of the Federal Reserve System (U.S.).
    15. Duffie, Darrell & Lando, David, 2001. "Term Structures of Credit Spreads with Incomplete Accounting Information," Econometrica, Econometric Society, vol. 69(3), pages 633-64, May.
    16. Hansen, Bruce E, 1997. "Approximate Asymptotic P Values for Structural-Change Tests," Journal of Business & Economic Statistics, American Statistical Association, vol. 15(1), pages 60-67, January.
    17. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-56, July.
    18. Ali, Mir M. & Mikhail, N. N. & Haq, M. Safiul, 1978. "A class of bivariate distributions including the bivariate logistic," Journal of Multivariate Analysis, Elsevier, vol. 8(3), pages 405-412, September.
    19. Hayette Gatfaoui, 2010. "Investigating the dependence structure between credit default swap spreads and the U.S. financial market," Annals of Finance, Springer, vol. 6(4), pages 511-535, October.
    20. Torben G. Andersen & Luca Benzoni & Jesper Lund, 2001. "An Empirical Investigation of Continuous-Time Equity Return Models," NBER Working Papers 8510, National Bureau of Economic Research, Inc.
    21. Philippe Jorion & Gaiyan Zhang, 2009. "Credit Contagion from Counterparty Risk," Journal of Finance, American Finance Association, vol. 64(5), pages 2053-2087, October.
    22. Jorion, Philippe & Zhang, Gaiyan, 2007. "Good and bad credit contagion: Evidence from credit default swaps," Journal of Financial Economics, Elsevier, vol. 84(3), pages 860-883, June.
    23. Bates, David S, 1996. "Jumps and Stochastic Volatility: Exchange Rate Processes Implicit in Deutsche Mark Options," Review of Financial Studies, Society for Financial Studies, vol. 9(1), pages 69-107.
    24. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
    25. Chen, Yi-Hsuan & Tu, Anthony H. & Wang, Kehluh, 2008. "Dependence structure between the credit default swap return and the kurtosis of the equity return distribution: Evidence from Japan," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 18(3), pages 259-271, July.
    26. Alexander, Carol & Kaeck, Andreas, 2008. "Regime dependent determinants of credit default swap spreads," Journal of Banking & Finance, Elsevier, vol. 32(6), pages 1008-1021, June.
    27. Joe, H., 1993. "Parametric Families of Multivariate Distributions with Given Margins," Journal of Multivariate Analysis, Elsevier, vol. 46(2), pages 262-282, August.
    28. N'Diaye, Papa & Zhang, Ping & Zhang, Wenlang, 2010. "Structural reform, intra-regional trade, and medium-term growth prospects of East Asia and the Pacific--Perspectives from a new multi-region model," Journal of Asian Economics, Elsevier, vol. 21(1), pages 20-36, February.
    29. Fathi Abid & Nader Naifar, 2005. "The Impact Of Stock Returns Volatility On Credit Default Swap Rates: A Copula Study," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 8(08), pages 1135-1155.
    30. Zhang, Wenlang & Zhang, Zhiwei & Han, Gaofeng, 2010. "How does the US credit crisis affect the Asia-Pacific economies?--Analysis based on a general equilibrium model," Journal of Asian Economics, Elsevier, vol. 21(3), pages 280-292, June.
    31. Carr, Peter & Wu, Liuren, 2007. "Theory and evidence on the dynamic interactions between sovereign credit default swaps and currency options," Journal of Banking & Finance, Elsevier, vol. 31(8), pages 2383-2403, August.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as in new window

    Cited by:
    1. Liao, Jui-Jung & Shih, Ching-Hui & Chen, Tai-Feng & Hsu, Ming-Fu, 2014. "An ensemble-based model for two-class imbalanced financial problem," Economic Modelling, Elsevier, vol. 37(C), pages 175-183.

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:eee:ecmode:v:29:y:2012:i:2:p:119-131. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.