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Empirical evidence on the dependence of credit default swaps and equity prices

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  • Debbie Dupuis
  • Eric Jacquier
  • Nicolas Papageorgiou
  • Bruno Rémillard

Abstract

We investigate the common practice of estimating the dependence structure between credit default swap prices on multi‐name credit instruments from the dependence structure of the equity returns of the underlying firms. We find convincing evidence that the practice is inappropriate for high‐yield instruments and that it may even be flawed for instruments containing only firms within a sector. To do this, we model individual credit ratings by univariate continuous time Markov chains, and their joint dynamics by copulas. The use of copulas allows us to incorporate our knowledge of the modeling of univariate processes, into a multivariate framework. However, our test and results are robust to the choice of copula. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 29:695–712, 2009

Suggested Citation

  • Debbie Dupuis & Eric Jacquier & Nicolas Papageorgiou & Bruno Rémillard, 2009. "Empirical evidence on the dependence of credit default swaps and equity prices," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 29(8), pages 695-712, August.
    • Handle: RePEc:wly:jfutmk:v:29:y:2009:i:8:p:695-712
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    Cited by:

    1. Mensi, Walid & Shahzad, Syed Jawad Hussain & Hammoudeh, Shawkat & Hkiri, Besma & Hamed Al Yahyaee, Khamis, 2019. "Long-run relationships between US financial credit markets and risk factors: Evidence from the quantile ARDL approach," Finance Research Letters, Elsevier, vol. 29(C), pages 101-110.
    2. Wu, Po-Chin & Liu, Shiao-Yen & Chen, Che-Ying, 2016. "Re-examining risk premiums in the Fama–French model: The role of investor sentiment," The North American Journal of Economics and Finance, Elsevier, vol. 36(C), pages 154-171.

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