Modelling Dependence Structure with Archimedian Copulas and Applications to the iTraxx CDS Index : An Update
The study of Naifar (2011) was the first to investigate the nonlinear relationship between credit default swaps and stock market conditions in Australia. This study was a major contribution to the literature, and set the scene for further investigation. In 2008, the global financial crisis hit the financial markets with devastating effects, pushing most firms under various levels of financial distress. Consequently, the stock market experienced a significant drop in share price and the CDS spreads reacted to such exogenous shocks by increasing their risk-premiums. This study addresses such changes within the context of CDS spreads. Contrary to Naifar's findings and by splitting the data into pre- and post-GFC, we observe a negative co-movement in the behavior between CDS spreads and equity-prices. This finding is more in line with general finance theory expectations and is robust to several proxies for equity indices. The relationship between CDS spreads and equity prices is closely monitored within financial markets as arbitrage possibilities exist for investors who successfully exploit the link between the two markets. A phenomenon more commonly known as capital structure arbitrage, or 'capital structure inbreeding' (Currie and Morris, 2002). In a recent paper published in this journal, Naifar (2011) used a dataset from 2006 till 2009 to investigate such relationship within the Australian context, reporting a positive co-movement in the relationship between CDS spreads and equity prices. This was an important contribution to the literature, setting the scene for further empirical investigation in view of the global financial crisis (GFC) where financial distress situations force stock prices to drop and CDSs to charge more premium as the default risk increases
Year of publication: |
2012
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Authors: | Vosgha, Hamed |
Publisher: |
[S.l.] : SSRN |
Description of contents: | Abstract [papers.ssrn.com] |
Saved in:
Extent: | 1 Online-Ressource |
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Type of publication: | Book / Working Paper |
Language: | English |
Notes: | Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments August 24, 2012 erstellt Volltext nicht verfügbar |
Source: | ECONIS - Online Catalogue of the ZBW |
Persistent link: https://www.econbiz.de/10014166095
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