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Asymmetric convergence in US financial credit default swap sector index markets

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  • Chen, Li-Hsueh
  • Hammoudeh, Shawkat
  • Yuan, Yuan

Abstract

This study examines the asymmetric adjustments to the long-run equilibrium for credit default swap (CDS) sector indexes of three financial sectors – banking, financial services and insurance – in the presence of a threshold effect. The results of the momentum-threshold autoregression (M-TAR) models demonstrate that asymmetric cointegration exists for all pairs comprised of those three CDS indexes. The speeds of adjustment in the long-run are much higher in the case of adjustments from below the threshold than from above for all the pairs. The estimates of The MTAR-VEC models suggest that the dual CDS index return in each sector pair participates in the adjustment to equilibrium in the short- and long-run taken together. But in the long-run alone, only one of the two spreads in each pair participates. Policy implications are also provided.

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Bibliographic Info

Article provided by Elsevier in its journal The Quarterly Review of Economics and Finance.

Volume (Year): 51 (2011)
Issue (Month): 4 ()
Pages: 408-418

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Handle: RePEc:eee:quaeco:v:51:y:2011:i:4:p:408-418

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Web page: http://www.elsevier.com/locate/inca/620167

Related research

Keywords: Credit default swaps; Threshold; Asymmetric adjustment; Widenings; Narrowings;

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References

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  1. Acharya, Viral V & Johnson, Tim, 2005. "Insider Trading in Credit Derivatives," CEPR Discussion Papers 5180, C.E.P.R. Discussion Papers.
  2. 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.
  3. Balke, Nathan S & Fomby, Thomas B, 1997. "Threshold Cointegration," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(3), pages 627-45, August.
  4. Haibin Zhu, 2006. "An Empirical Comparison of Credit Spreads between the Bond Market and the Credit Default Swap Market," Journal of Financial Services Research, Springer, vol. 29(3), pages 211-235, June.
  5. 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.
  6. William R. Emmons & Frank A. Schmid, 2004. "Monetary policy actions and the incentive to invest," Working Papers 2004-018, Federal Reserve Bank of St. Louis.
  7. Enders, Walter & Siklos, Pierre L, 2001. "Cointegration and Threshold Adjustment," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(2), pages 166-76, April.
  8. Duffie, Darrell & Singleton, Kenneth J, 1999. "Modeling Term Structures of Defaultable Bonds," Review of Financial Studies, Society for Financial Studies, vol. 12(4), pages 687-720.
  9. 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.).
  10. Hansen Bruce E., 1997. "Inference in TAR Models," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 2(1), pages 1-16, April.
  11. Enders, Walter & Granger, Clive W J, 1998. "Unit-Root Tests and Asymmetric Adjustment with an Example Using the Term Structure of Interest Rates," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(3), pages 304-11, July.
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Cited by:
  1. Tamakoshi, Go & Hamori, Shigeyuki, 2014. "Spillovers among CDS indexes in the US financial sector," The North American Journal of Economics and Finance, Elsevier, vol. 27(C), pages 104-113.

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