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Extracting the sovereigns’ CDS market hierarchy: A correlation-filtering approach

Author

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  • León, Carlos
  • Leiton, Karen
  • Pérez, Jhonatan

Abstract

This paper employs correlation-into-distance mapping techniques and a minimal spanning tree-based correlation-filtering methodology on 36 sovereign CDS spread time-series in order to identify the sovereigns’ informational hierarchy. The resulting hierarchy (i) concurs with sovereigns’ eigenvector centrality; (ii) confirms the importance of geographical and credit rating clustering; (iii) identifies Russia, Turkey and Brazil as regional benchmarks; (iv) reveals the idiosyncratic nature of Japan and United States; (v) confirms that a small set of common factors affects the system; (vi) suggests that lower-medium grade rated sovereigns are the most influential, but also the most prone to contagion; and (vii) suggests the existence of a “Latin American common factor”.

Suggested Citation

  • León, Carlos & Leiton, Karen & Pérez, Jhonatan, 2014. "Extracting the sovereigns’ CDS market hierarchy: A correlation-filtering approach," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 415(C), pages 407-420.
  • Handle: RePEc:eee:phsmap:v:415:y:2014:i:c:p:407-420
    DOI: 10.1016/j.physa.2014.08.020
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    References listed on IDEAS

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    Cited by:

    1. repec:taf:quantf:v:17:y:2017:i:12:p:1905-1922 is not listed on IDEAS
    2. Carlos León & Geun-Young Kim & Constanza Martínez & Daeyup Lee, 2017. "Equity markets’ clustering and the global financial crisis," Quantitative Finance, Taylor & Francis Journals, vol. 17(12), pages 1905-1922, December.

    More about this item

    Keywords

    Sovereign risk; Correlation-filtering; Credit default swap; Clustering; Hierarchy;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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