Can Credit Default Swaps Predict Financial Crises? Empirical Study On Emerging Markets
We explore the informational value of credit default swaps and the extent to which they may be linked to financial crises. After developing a theoretical framework to model the relationship between credit default swap market and equity and currency markets, we apply an empirical study which uses logistic regressions and a panel data sample of emerging markets to assess the ability of these financial instruments to predict crises. Regarding them as reflections of future expectations of investors on the outcomes of currency and equity markets, we find credit default swaps to be a significant indicator explaining the periods proceeding financial crises, at least in equity markets. The inclusion of credit default swaps as a factor in models that predict crises and their ability to improve predictions in equity market is a major contribution of this study to the existing literature.
Volume (Year): 4 (2009)
Issue (Month): 1(7)_ Spring 2009 ()
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"Predicting emerging market currency crashes,"
Journal of Empirical Finance,
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- Coudert, V. & Gex, M., 2006. "Can risk aversion indicators anticipate financial crises?," Financial Stability Review, Banque de France, issue 9, pages 67-87, December. Full references (including those not matched with items on IDEAS)
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