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Credit Default Swaps Drawup Networks: Too Tied To Be Stable?

  • Rahul Kaushik
  • Stefano Battiston

We analyse time series of CDS spreads for a set of major US and European institutions on a pe- riod overlapping the recent financial crisis. We extend the existing methodology of {\epsilon}-drawdowns to the one of joint {\epsilon}-drawups, in order to estimate the conditional probabilities of abrupt co-movements among spreads. We correct for randomness and for finite size effects and we find significant prob- ability of joint drawups for certain pairs of CDS. We also find significant probability of trend rein- forcement, i.e. drawups in a given CDS followed by drawups in the same CDS. Finally, we take the matrix of probability of joint drawups as an estimate of the network of financial dependencies among institutions. We then carry out a network analysis that provides insights into the role of systemically important financial institutions.

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File URL: http://arxiv.org/pdf/1205.0976
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Paper provided by arXiv.org in its series Papers with number 1205.0976.

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Date of creation: May 2012
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Handle: RePEc:arx:papers:1205.0976
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  1. Rahul Kaushik & Stefano Battiston, . "Credit Default Swaps Drawup Networks: Too Tied To Be Stable?," Working Papers ETH-RC-12-013, ETH Zurich, Chair of Systems Design.
  2. Stefano Battiston & Domenico Delli Gatti & Mauro Gallegati & Bruce Greenwald & Joseph E. Stiglitz, . "Default Cascades: When Does Risk Diversification Increase Stability?," Working Papers ETH-RC-11-006, ETH Zurich, Chair of Systems Design.
  3. Caldarelli, Guido, 2007. "Scale-Free Networks: Complex Webs in Nature and Technology," OUP Catalogue, Oxford University Press, number 9780199211517.
  4. Stefano Battiston & Domenico Delli Gatti & Mauro Gallegati & Bruce C. Greenwald & Joseph E. Stiglitz, 2009. "Liaisons Dangereuses: Increasing Connectivity, Risk Sharing, and Systemic Risk," NBER Working Papers 15611, National Bureau of Economic Research, Inc.
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