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Conditional Inferences Based on Vine Copulas with Applications to Credit Spread Data of Corporate Bonds

Author

Listed:
  • Shenyi Pan
  • Harry Joe
  • Guofu Li

Abstract

Understanding the dependence relationship of credit spreads of corporate bonds is important for risk management. Vine copula models with tail dependence are used to analyze a credit spread dataset of Chinese corporate bonds, understand the dependence among different sectors, and perform conditional inferences. It is shown how the effect of tail dependence affects risk transfer, or the conditional distributions given one variable is extreme. Vine copula models also provide more accurate cross prediction results compared with linear regressions. These conditional inference techniques are a statistical contribution for analysis of bond credit spreads of investment portfolios consisting of corporate bonds from various sectors.

Suggested Citation

  • Shenyi Pan & Harry Joe & Guofu Li, 2023. "Conditional Inferences Based on Vine Copulas with Applications to Credit Spread Data of Corporate Bonds," Journal of Financial Econometrics, Oxford University Press, vol. 21(3), pages 714-741.
    • Handle: RePEc:oup:jfinec:v:21:y:2023:i:3:p:714-741.
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    File URL: http://hdl.handle.net/10.1093/jjfinec/nbab016
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    More about this item

    Keywords

    bond credit spreads; conditional quantiles; conditional simulation; copula regression; prediction interval; tail dependence;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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