Conditional Inferences Based on Vine Copulas with Applications to Credit Spread Data of Corporate Bonds

Shenyi Pan, Harry Joe and Guofu Li

Journal of Financial Econometrics, 2023, vol. 21, issue 3, 714-741

Abstract: Understanding the dependence relationship of credit spreads of corporate bonds is important for risk management. Vine copula models with tail dependence are used to analyze a credit spread dataset of Chinese corporate bonds, understand the dependence among different sectors, and perform conditional inferences. It is shown how the effect of tail dependence affects risk transfer, or the conditional distributions given one variable is extreme. Vine copula models also provide more accurate cross prediction results compared with linear regressions. These conditional inference techniques are a statistical contribution for analysis of bond credit spreads of investment portfolios consisting of corporate bonds from various sectors.

Keywords: bond credit spreads; conditional quantiles; conditional simulation; copula regression; prediction interval; tail dependence (search for similar items in EconPapers)
JEL-codes: C51 C52 C53 (search for similar items in EconPapers)
Date: 2023
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