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On the performances of Dynamic Conditional Correlation models in the Sovereign CDS market and the corresponding bond market

Author

Listed:
  • Saker Sabkha

    (SAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon)

  • Christian de Peretti

    (SAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon)

Abstract

The study of an efficient financial assets' modeling method is still an open hot issue especially during recent crises. Using credit risk data from 33 worldwide countries, this paper investigates the performance of 9 Dynamic Conditional Correlation models taking into account different properties of financial markets (long memory behavior, asymmetry and/or leverage effects...). This comparative study is based on the results of several multivariate diagnostic tests. Findings show that no model outperforms the others in all situations, though, the straightforward DCC-GARCH model seems to provide the most relevant estimator parameters. Yet, the innovations distributions assumption significantly impacts the statistical fit of the model. Our work is useful for financial markets' participants so as to making decision in terms of arbitrage, hedging or speculation. JEL Classification G11, G12, F02, C58

Suggested Citation

  • Saker Sabkha & Christian de Peretti, 2022. "On the performances of Dynamic Conditional Correlation models in the Sovereign CDS market and the corresponding bond market," Post-Print hal-01710398, HAL.
    • Handle: RePEc:hal:journl:hal-01710398
    DOI: 10.1142/9781786349507_0008
    Note: View the original document on HAL open archive server: https://hal.science/hal-01710398
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    References listed on IDEAS

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    More about this item

    Keywords

    DCC-class models; Multivariate diagnostic tests; Time-varying correlation; Sovereign credit market;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • F02 - International Economics - - General - - - International Economic Order and Integration
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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