Asymmetric convergence in US financial credit default swap sector index markets

Li-Hsueh Chen, Shawkat Hammoudeh and Yuan Yuan

The Quarterly Review of Economics and Finance, 2011, vol. 51, issue 4, 408-418

Abstract: This study examines the asymmetric adjustments to the long-run equilibrium for credit default swap (CDS) sector indexes of three financial sectors – banking, financial services and insurance – in the presence of a threshold effect. The results of the momentum-threshold autoregression (M-TAR) models demonstrate that asymmetric cointegration exists for all pairs comprised of those three CDS indexes. The speeds of adjustment in the long-run are much higher in the case of adjustments from below the threshold than from above for all the pairs. The estimates of The MTAR-VEC models suggest that the dual CDS index return in each sector pair participates in the adjustment to equilibrium in the short- and long-run taken together. But in the long-run alone, only one of the two spreads in each pair participates. Policy implications are also provided.

Keywords: Credit default swaps; Threshold; Asymmetric adjustment; Widenings; Narrowings (search for similar items in EconPapers)
JEL-codes: G13 G14 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:51:y:2011:i:4:p:408-418

DOI: 10.1016/j.qref.2011.06.001

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