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Equity market information and credit risk signaling: A quantile cointegrating regression approach

Hayette Gatfaoui

Economic Modelling, 2017, vol. 64, issue C, 48-59

Abstract: Investigating linkages between credit and equity markets, we consider daily aggregate U.S. CDS spreads as well as well-chosen equity market and implied volatility indexes over ten years. We describe such robust (to spurious correlation) relationship with the quantile cointegrating regression approach. Such approach handles extreme quantiles/CDS values and their behavior with respect to the equity market's influence. Heteroskedastic patterns such as time-varying variance, but also autocorrelation, skewness and leptokurtosis are captured. Thus, the sensitivity of aggregate CDS spreads to equity market price and volatility channels is accurately measured across quantiles and spreads. Such quantile-dependent sensitivity exhibits asymmetric responses to equity market shocks. A sub-period analysis investigates potential regime shifts in estimated quantile cointegrating regressions. Quantile cointegrating coefficients vary over time and quantiles, and exhibit different magnitudes across sub-periods and spreads. Therefore, the relationship is unstable over time. We also propose a scenario analysis and risk signaling application for credit risk management prospects. Under specific risk levels, credit risky situations are described conditional on the equity market's information over time, and related expected aggregate CDS spreads are computed. Estimated conditional quantiles/CDS spreads act as credit alert triggers.

Keywords: C32; C58; D81; CDS; Cointegration; Credit risk; Fat tail; Implied volatility; Market risk; Quantile regression; Regime shifts; Risk management; Risk signal; Skewness (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (1)

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Working Paper: Equity market information and credit risk signaling: A quantile cointegrating regression approach (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:64:y:2017:i:c:p:48-59

DOI: 10.1016/j.econmod.2017.03.012

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