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Regime switching dynamics in credit default swaps: Evidence from smooth transition autoregressive model

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  • Huang, Alex YiHou
  • Hu, Wen-Cheng
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    Abstract

    This paper investigates the dynamics of credit default swap (CDS) spread. We first find auto-correlations and cross-correlations of the CDS series and the CDS average by employing detrended cross-correlation analysis (DCCA). We then employ smooth transition autoregressive (STAR) models to characterize the regime switching behavior of 28 US corporate CDS series from January 2007 through October 2009. In each case, we find clear evidence for transitions between low-price and high-price regimes. The threshold estimations of the STAR model effectively differentiate the price regimes, where the first transition consistently coincides with the explosion of the crisis in late 2008.

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    Bibliographic Info

    Article provided by Elsevier in its journal Physica A: Statistical Mechanics and its Applications.

    Volume (Year): 391 (2012)
    Issue (Month): 4 ()
    Pages: 1497-1508

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    Handle: RePEc:eee:phsmap:v:391:y:2012:i:4:p:1497-1508

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    Web page: http://www.journals.elsevier.com/physica-a-statistical-mechpplications/

    Related research

    Keywords: Credit default swap; Detrended cross-correlations analysis; Smooth transition autoregressive model; Financial crisis;

    References

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    9. Terasvirta, T & Anderson, H M, 1992. "Characterizing Nonlinearities in Business Cycles Using Smooth Transition Autoregressive Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages S119-36, Suppl. De.
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    11. Tse, Yiuman, 2001. "Index arbitrage with heterogeneous investors: A smooth transition error correction analysis," Journal of Banking & Finance, Elsevier, vol. 25(10), pages 1829-1855, October.
    12. 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.
    13. Kumar, Sunil & Deo, Nivedita, 2009. "Multifractal properties of the Indian financial market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 388(8), pages 1593-1602.
    14. Du, Guoxiong & Ning, Xuanxi, 2008. "Multifractal properties of Chinese stock market in Shanghai," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 387(1), pages 261-269.
    15. Litvin, Vladimir A., 2004. "Multiscaling behavior of transition economies before and after 1998 Russian financial crisis," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 344(1), pages 19-23.
    16. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
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