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Assessment of time-varying systemic risk in credit default swap indices: Simultaneity and contagiousness

Geon Ho Choe, So Eun Choi and Hyun Jin Jang

The North American Journal of Economics and Finance, 2020, vol. 54, issue C

Abstract: This study assesses systemic risk inherent in credit default swap (CDS) indices using empirical and statistical analyses. We define systemic risk in two perspectives: the possibilities of simultaneous and contagious defaults, and then quantify them separately across benchmark models. To do so, we employ a Marshall-Olkin copula model to measure simultaneous default risk, and an interacting intensity-based model to capture contagious default risk. For an empirical test, we collect daily data for the iTraxx Europe CDS index and its tranche prices in the period from 2005 to 2014, and calibrate model parameters varying across time. In addition, we select forecasting models that have minimal prediction errors for the calibrated time series. Finally, we identify significant changes in each dynamic of systemic risk indicator before and after default and downgrade-related episodes that have occurred in the global financial crisis and European sovereign debt crisis.

Keywords: Systemic risk; CDS index; Marshall-Olkin copula; Interacting intensity-based model; Calibration; Forecasting (search for similar items in EconPapers)
JEL-codes: C22 C52 C53 G13 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.najef.2019.01.004

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