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Change Analysis for the Dependence Structure and Dynamic Pricing of Basket Default Swaps

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  • Ping Li
  • Ze†Zheng Li

Abstract

In this paper we use a type of dynamic copula method to characterise the dependence structure between financial assets and price basket default swaps (BDSs). We first employ a goodness†of†fit test and a binary segmentation procedure to analyse the change of dependence structure between the obligations underlying a BDS, then present a numerical example to demonstrate the change analysis and BDS pricing process. We find that in different time periods, the best copula fitting the data is not the same; therefore the tranche spreads of the BDS are also different. We also compare our results with those obtained from static copulas and dynamic Gaussian copulas. The results show that the static copula and dynamic Gaussian copula methods underestimate the spreads for riskier tranches and overestimate those for less risky tranches.

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  • Ping Li & Ze†Zheng Li, 2015. "Change Analysis for the Dependence Structure and Dynamic Pricing of Basket Default Swaps," European Financial Management, European Financial Management Association, vol. 21(4), pages 646-671, September.
    • Handle: RePEc:bla:eufman:v:21:y:2015:i:4:p:646-671
    DOI: 10.1111/eufm.12036
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    References listed on IDEAS

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    Cited by:

    1. Li, Jie & Li, Ping, 2021. "Empirical analysis of the dynamic dependence between WTI oil and Chinese energy stocks," Energy Economics, Elsevier, vol. 93(C).
    2. Su, Xiaoshan & Li, Yuhan, 2024. "Robust portfolio selection with subjective risk aversion under dependence uncertainty," Economic Modelling, Elsevier, vol. 132(C).
    3. Han, Yingwei & Li, Ping & Xia, Yong, 2017. "Dynamic robust portfolio selection with copulas," Finance Research Letters, Elsevier, vol. 21(C), pages 190-200.

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