2014-08-29Buch DOI: 10.18452/4526
The integration ofcredit default swapmarkets in the pre andpost-subprime crisis incommon stochastic trends
Chen, Cathy Yi-Hsuan
Härdle, Wolfgang Karl
It was evident that credit default swap (CDS) spreads have been highly correlated during the recent financial crisis. Motivated by this evidence, this study attempts to investigate the extent to which CDS markets across regions, maturities and credit ratings have integrated more in crisis. By applying the Panel Analysis of Non-stationarity in Idiosyncratic and Common components method (PANIC) developed by Bai and Ng (2004), we observe a potential shift in CDS integration between the pre- and post-Lehman collapse period, indicating that the system of CDS spreads is tied to a long-run equilibrium path. This finding contributes to a credit risk management task and also coincides with the missions of Basel III since the more integrated CDS markets could result in correlated default, credit contagion and simultaneous downgrading in the future.
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