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The integration of credit default swap markets in the pre and post-subprime crisis in common stochastic trends

Author

Listed:
  • Cathy Yi-Hsuan Chen
  • Wolfgang Karl Härdle
  • Hien Pham-Thu

Abstract

It was evident that credit default swap (CDS) spreads have been highly correlated during the recent financial crisis. Motivated by this evidence, this study attempts to investigate the extent to which CDS markets across regions, maturities and credit ratings have integrated more in crisis. By applying the Panel Analysis of Non-stationarity in Idiosyncratic and Common components method (PANIC) developed by Bai and Ng (2004), we observe a potential shift in CDS integration between the pre- and post-Lehman collapse period, indicating that the system of CDS spreads is tied to a long-run equilibrium path. This finding contributes to a credit risk management task and also coincides with the missions of Basel III since the more integrated CDS markets could result in correlated default, credit contagion and simultaneous downgrading in the future.

Suggested Citation

  • Cathy Yi-Hsuan Chen & Wolfgang Karl Härdle & Hien Pham-Thu, 2014. "The integration of credit default swap markets in the pre and post-subprime crisis in common stochastic trends," SFB 649 Discussion Papers SFB649DP2014-039, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    • Handle: RePEc:hum:wpaper:sfb649dp2014-039
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    File URL: http://sfb649.wiwi.hu-berlin.de/papers/pdf/SFB649DP2014-039.pdf
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    Cited by:

    1. Atil, Ahmed & Bradford, Marc & Elmarzougui, Abdelaziz & Lahiani, Amine, 2016. "Conditional dependence of US and EU sovereign CDS: A time-varying copula-based estimation," Finance Research Letters, Elsevier, vol. 19(C), pages 42-53.

    More about this item

    Keywords

    Credit default swaps; cointegration; common stochastic trend; correlated default;
    All these keywords.

    JEL classification:

    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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