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Modeling financial crisis period: A volatility perspective of Credit Default Swap market

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  • Kim, Kyungwon

Abstract

The volatility of financial markets is often assumed constant, but phenomena such as volatility clustering and jumps in volatility suggest that this assumption is rarely true. Numerous studies have been conducted to investigate the jump or breakpoint of the volatility phenomenon, and their findings have been applied in modeling volatility. However, few studies address the issue from a practical point of view. Specifically, a financial crisis accompanied by markedly increased volatility can be approached from this perspective to suggest the persistence or termination of a crisis. This paper develops the ICSS-CRISIS algorithm, a new approach to identify a crisis period along with the conditions for the ICSS algorithm which represents the structural breakpoints of volatility. This algorithm recommends a guideline to determine whether an existing crisis in the market resulted from financial volatility, was terminated, or is continuing. The method is tested along with the ICSS algorithm to prove the effectiveness of Credit Default Swap index data.

Suggested Citation

  • Kim, Kyungwon, 2013. "Modeling financial crisis period: A volatility perspective of Credit Default Swap market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(20), pages 4977-4988.
  • Handle: RePEc:eee:phsmap:v:392:y:2013:i:20:p:4977-4988
    DOI: 10.1016/j.physa.2013.06.016
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    Cited by:

    1. Peiwan Wang & Lu Zong & Ye Ma, 2019. "An Integrated Early Warning System for Stock Market Turbulence," Papers 1911.12596, arXiv.org.
    2. Kim, Kyungwon & Jung, Sean S., 2014. "Empirical analysis of structural change in Credit Default Swap volatility," Chaos, Solitons & Fractals, Elsevier, vol. 60(C), pages 56-67.
    3. Park, Sung Y. & Ryu, Doojin & Song, Jeongseok, 2017. "The dynamic conditional relationship between stock market returns and implied volatility," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 482(C), pages 638-648.

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