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Correlated Defaults of UK Banks: Dynamics and Asymmetries

Listed author(s):
  • Mario Cerrato
  • John Crosby
  • Minjoo Kim
  • Yang Zhao

We document asymmetric and time-varying features of dependence between the credit risks of global systemically important banks (G-SIBs) in the UK banking industry using a CDS dataset. We model the dependence of CDS spreads using a dynamic asymmetric cop- ula. Comparing our model with traditional copula models, we find that they usually under- estimate the probability of joint (or conditional) default in the UK G-SIBs. Furthermore, we show that dynamics and asymmetries between CDS spreads are closely associated with the probabilities of joint (or conditional) default through the extensive regression analysis. Especially, our regression analysis provides a policy implication that copula correlation or tail dependence coefficients are able to be leading indicators for the systemic credit event.

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File URL: http://www.gla.ac.uk/media/media_433854_en.pdf
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Paper provided by Business School - Economics, University of Glasgow in its series Working Papers with number 2015_24.

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Date of creation: Oct 2015
Handle: RePEc:gla:glaewp:2015_24
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