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Default dependence in the insurance and banking sectors: A copula approach

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  • Zhang, Xuan
  • Kim, Minjoo
  • Yan, Cheng
  • Zhao, Yang

Abstract

We employ a time-varying asymmetric copula model that combines the generalized autoregressive score model with the generalized hyperbolic skewed t copula to capture the dynamics and asymmetry of default dependence between insurers and banks. We identify the term structure of default dependence between these two sectors. The short-term and long-term dependence of default risk rise and converge during financial crises. We explore the determinants of the time-series variation in default dependence. While traditional macro variables can explain only a small portion of the variation in default dependence, we find a significant negative correlation between default dependence and global geopolitical risk.

Suggested Citation

  • Zhang, Xuan & Kim, Minjoo & Yan, Cheng & Zhao, Yang, 2024. "Default dependence in the insurance and banking sectors: A copula approach," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 91(C).
    • Handle: RePEc:eee:intfin:v:91:y:2024:i:c:s1042443123001798
    DOI: 10.1016/j.intfin.2023.101911
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    More about this item

    Keywords

    Insurers; Probability of default; Default dependence; Copula; Determinants;
    All these keywords.

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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