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Asymmetric convergence in US financial credit default swap sector index markets

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

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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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
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620167

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