Financial linkages between US sector credit default swaps markets
Mohamed Arouri (),
Fredj Jawadi () and
Duc Khuong Nguyen
Journal of International Financial Markets, Institutions and Money, 2014, vol. 33, issue C, 223-243
We investigate the dynamic relationships between the US five-year financial CDS sector index spreads for the banking, financial services and insurance sectors in the short- and long-run over the recent period which is marked by the onset of the global financial crisis. For this purpose, we implement a Smooth Transition Error-Correction Model (STECM) to accommodate the presence of nonlinearities and asymmetry in the adjustment process of the CDS variables toward their long-run equilibrium. Our findings provide evidence of significant long-run equilibrium links for two out of the three CDS indices, which are found to be typically asymmetric and nonlinear. These findings are more potent and more strongly policy oriented when the control variables are introduced into an extended STECM.
Keywords: Sector CDS indices; Credit risk; Long-run equilibrium; Nonlinear risk models; Forcing variables (search for similar items in EconPapers)
JEL-codes: C58 G11 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:33:y:2014:i:c:p:223-243
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