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

  • Rahul Kaushik

    ()

  • Stefano Battiston

\begin{abstract} We analyse time series of CDS spreads for a set of major US and European institutions on a period overlapping the recent financial crisis. We extend the existing methodology of \emph{$\varepsilon$-drawdowns} to the one of \emph{joint $\varepsilon$-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 statistically significant probabilities of joint drawups for many pairs of CDS. We also find significant probabilities of trend reinforcement, 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. \end{abstract}

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Paper provided by ETH Zurich, Chair of Systems Design in its series Working Papers with number ETH-RC-12-013.

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Handle: RePEc:stz:wpaper:eth-rc-12-013
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  1. 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.
  2. 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.
  3. Caldarelli, Guido, 2007. "Scale-Free Networks: Complex Webs in Nature and Technology," OUP Catalogue, Oxford University Press, number 9780199211517, March.
  4. Battiston, Stefano & Delli Gatti, Domenico & Gallegati, Mauro & Greenwald, Bruce & Stiglitz, Joseph E., 2012. "Liaisons dangereuses: Increasing connectivity, risk sharing, and systemic risk," Journal of Economic Dynamics and Control, Elsevier, vol. 36(8), pages 1121-1141.
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