IDEAS home Printed from https://ideas.repec.org/a/eee/phsmap/v479y2017icp324-340.html
   My bibliography  Save this article

Simulation of sovereign CDS market based on interaction between market participant

Author

Listed:
  • Ko, Bonggyun
  • Kim, Kyungwon

Abstract

A research for distributional property of financial asset is the subject of intense interest not only for financial theory but also for practitioner. Such respect is no exception to CDS market. The CDS market, which began to receive attention since the global financial debacle, is not well researched despite of the importance of research necessity. This research introduces creation of CDS market and use Ising system utilizing occurrence characteristics (to shift risk) as an important factor. Therefore the results of this paper would be of great assistance to both financial theory and practice. From this study, not only distributional property of the CDS market but also various statistics like multifractal characteristics could promote understanding about the market. A salient point in this study is that countries are mainly clustering into 2 groups and it might be because of market situation and geographical characteristics of each country. This paper suggested 2 simulation parameters representing this market based on understanding such CDS market situation. The estimated parameters are suitable for high and low risk event of CDS market respectively and these two parameters are complementary and can cover not only basic statistics but also multifractal properties of most countries. Therefore these estimated parameters can be used in researches preparing for a certain event (high or low risk). Finally this research will serve as a momentum double-checking indirectly the performance of Ising system based on these results.

Suggested Citation

  • Ko, Bonggyun & Kim, Kyungwon, 2017. "Simulation of sovereign CDS market based on interaction between market participant," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 479(C), pages 324-340.
    • Handle: RePEc:eee:phsmap:v:479:y:2017:i:c:p:324-340
    DOI: 10.1016/j.physa.2017.03.012
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0378437117302376
    Download Restriction: Full text for ScienceDirect subscribers only. Journal offers the option of making the article available online on Science direct for a fee of $3,000
    File URL: https://libkey.io/10.1016/j.physa.2017.03.012?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Coronel-Brizio, H.F. & Hernández-Montoya, A.R., 2005. "On fitting the Pareto–Levy distribution to stock market index data: Selecting a suitable cutoff value," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 354(C), pages 437-449.
    2. Parameswaran Gopikrishnan & Vasiliki Plerou & Luis A. Nunes Amaral & Martin Meyer & H. Eugene Stanley, 1999. "Scaling of the distribution of fluctuations of financial market indices," Papers cond-mat/9905305, arXiv.org.
    3. Pagan, Adrian, 1996. "The econometrics of financial markets," Journal of Empirical Finance, Elsevier, vol. 3(1), pages 15-102, May.
    4. Black, Fischer & Cox, John C, 1976. "Valuing Corporate Securities: Some Effects of Bond Indenture Provisions," Journal of Finance, American Finance Association, vol. 31(2), pages 351-367, May.
    5. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    6. K. Sznajd-Weron & R. Weron, 2002. "A Simple Model Of Price Formation," International Journal of Modern Physics C (IJMPC), World Scientific Publishing Co. Pte. Ltd., vol. 13(01), pages 115-123.
    7. J.-P. Bouchaud & M. Potters & M. Meyer, 2000. "Apparent multifractality in financial time series," The European Physical Journal B: Condensed Matter and Complex Systems, Springer;EDP Sciences, vol. 13(3), pages 595-599, February.
    8. Sun, Xia & Chen, Huiping & Yuan, Yongzhuang & Wu, Ziqin, 2001. "Predictability of multifractal analysis of Hang Seng stock index in Hong Kong," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 301(1), pages 473-482.
    9. Rafał Weron, 2001. "Levy-Stable Distributions Revisited: Tail Index> 2does Not Exclude The Levy-Stable Regime," International Journal of Modern Physics C (IJMPC), World Scientific Publishing Co. Pte. Ltd., vol. 12(02), pages 209-223.
    10. Bouchaud,Jean-Philippe & Potters,Marc, 2003. "Theory of Financial Risk and Derivative Pricing," Cambridge Books, Cambridge University Press, number 9780521819169, October.
    11. R. Cont, 2001. "Empirical properties of asset returns: stylized facts and statistical issues," Quantitative Finance, Taylor & Francis Journals, vol. 1(2), pages 223-236.
    12. Sun, Xia & Chen, Huiping & Wu, Ziqin & Yuan, Yongzhuang, 2001. "Multifractal analysis of Hang Seng index in Hong Kong stock market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 291(1), pages 553-562.
    13. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    14. Robert A. Jarrow & David Lando & Stuart M. Turnbull, 2008. "A Markov Model for the Term Structure of Credit Risk Spreads," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 18, pages 411-453, World Scientific Publishing Co. Pte. Ltd..
    15. Wonseok Oh & Sangyong Jeon, 2007. "Membership Herding and Network Stability in the Open Source Community: The Ising Perspective," Management Science, INFORMS, vol. 53(7), pages 1086-1101, July.
    16. Wang, Jun, 2009. "The estimates of correlations in two-dimensional Ising model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 388(5), pages 565-573.
    17. Robert A. Jarrow & Stuart M. Turnbull, 2008. "Pricing Derivatives on Financial Securities Subject to Credit Risk," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 17, pages 377-409, World Scientific Publishing Co. Pte. Ltd..
    18. Canning, D. & Amaral, L. A. N. & Lee, Y. & Meyer, M. & Stanley, H. E., 1998. "Scaling the volatility of GDP growth rates," Economics Letters, Elsevier, vol. 60(3), pages 335-341, September.
    19. Benoit Mandelbrot, 2015. "The Variation of Certain Speculative Prices," World Scientific Book Chapters, in: Anastasios G Malliaris & William T Ziemba (ed.), THE WORLD SCIENTIFIC HANDBOOK OF FUTURES MARKETS, chapter 3, pages 39-78, World Scientific Publishing Co. Pte. Ltd..
    20. Kantelhardt, Jan W. & Zschiegner, Stephan A. & Koscielny-Bunde, Eva & Havlin, Shlomo & Bunde, Armin & Stanley, H.Eugene, 2002. "Multifractal detrended fluctuation analysis of nonstationary time series," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 316(1), pages 87-114.
    21. Gilles Teyssière & Alan P. Kirman (ed.), 2007. "Long Memory in Economics," Springer Books, Springer, number 978-3-540-34625-8, January.
    22. Bornholdt, Stefan & Wagner, Friedrich, 2002. "Stability of money: phase transitions in an Ising economy," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 316(1), pages 453-468.
    23. Fang, Wen & Wang, Jun, 2013. "Fluctuation behaviors of financial time series by a stochastic Ising system on a Sierpinski carpet lattice," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(18), pages 4055-4063.
    24. Thomas Lux & Michele Marchesi, 1999. "Scaling and criticality in a stochastic multi-agent model of a financial market," Nature, Nature, vol. 397(6719), pages 498-500, February.
    25. Sornette, Didier & Zhou, Wei-Xing, 2006. "Importance of positive feedbacks and overconfidence in a self-fulfilling Ising model of financial markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 370(2), pages 704-726.
    26. Xiao, Di & Wang, Jun, 2012. "Modeling stock price dynamics by continuum percolation system and relevant complex systems analysis," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(20), pages 4827-4838.
    27. L. De Haan & L. Peng, 1998. "Comparison of tail index estimators," Statistica Neerlandica, Netherlands Society for Statistics and Operations Research, vol. 52(1), pages 60-70, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Wang, Hu & Li, Shouwei, 2020. "Risk contagion in multilayer network of financial markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 541(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Fang, Wen & Wang, Jun, 2013. "Fluctuation behaviors of financial time series by a stochastic Ising system on a Sierpinski carpet lattice," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(18), pages 4055-4063.
    2. Quanbo Zha & Gang Kou & Hengjie Zhang & Haiming Liang & Xia Chen & Cong-Cong Li & Yucheng Dong, 2020. "Opinion dynamics in finance and business: a literature review and research opportunities," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 6(1), pages 1-22, December.
    3. Johann Lussange & Ivan Lazarevich & Sacha Bourgeois-Gironde & Stefano Palminteri & Boris Gutkin, 2021. "Modelling Stock Markets by Multi-agent Reinforcement Learning," Computational Economics, Springer;Society for Computational Economics, vol. 57(1), pages 113-147, January.
    4. Diep, Hung T. & Desgranges, Gabriel, 2021. "Dynamics of the price behavior in stock markets: A statistical physics approach," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 570(C).
    5. Su-Lien Lu & Chau-Jung Kuo, 2005. "How to gauge the credit risk of guarantee issues in a Taiwanese bills finance company: an empirical investigation using a market-based approach," Applied Financial Economics, Taylor & Francis Journals, vol. 15(16), pages 1153-1164.
    6. Jia, Linlu & Ke, Jinchuan & Wang, Jun, 2019. "Volatility aggregation intensity energy futures series on stochastic finite-range exclusion dynamics," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 514(C), pages 370-383.
    7. Zhang, Bo & Wang, Guochao & Wang, Yiduan & Zhang, Wei & Wang, Jun, 2019. "Multiscale statistical behaviors for Ising financial dynamics with continuum percolation jump," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 525(C), pages 1012-1025.
    8. Augusto Castillo, 2004. "Firm and Corporate Bond Valuation: A Simulation Dynamic Programming Approach," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 41(124), pages 345-360.
    9. Michael C. Munnix & Rudi Schafer & Thomas Guhr, 2011. "A Random Matrix Approach to Credit Risk," Papers 1102.3900, arXiv.org, revised Jun 2011.
    10. Giesecke, Kay & Longstaff, Francis A. & Schaefer, Stephen & Strebulaev, Ilya, 2011. "Corporate bond default risk: A 150-year perspective," Journal of Financial Economics, Elsevier, vol. 102(2), pages 233-250.
    11. Anirban Chakraborti & Ioane Muni Toke & Marco Patriarca & Frederic Abergel, 2011. "Econophysics review: I. Empirical facts," Quantitative Finance, Taylor & Francis Journals, vol. 11(7), pages 991-1012.
    12. Samuel Chege Maina, 2011. "Credit Risk Modelling in Markovian HJM Term Structure Class of Models with Stochastic Volatility," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 1-2011, January-A.
    13. Hayne E. Leland., 1998. "Agency Costs, Risk Management, and Capital Structure," Research Program in Finance Working Papers RPF-278, University of California at Berkeley.
    14. Jiang, Zhi-Qiang & Zhou, Wei-Xing, 2008. "Multifractality in stock indexes: Fact or Fiction?," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 387(14), pages 3605-3614.
    15. Gatzert, Nadine & Martin, Michael, 2012. "Quantifying credit and market risk under Solvency II: Standard approach versus internal model," Insurance: Mathematics and Economics, Elsevier, vol. 51(3), pages 649-666.
    16. Eisler, Z. & Kertész, J., 2004. "Multifractal model of asset returns with leverage effect," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 343(C), pages 603-622.
    17. Jovanovic, Franck & Schinckus, Christophe, 2017. "Econophysics and Financial Economics: An Emerging Dialogue," OUP Catalogue, Oxford University Press, number 9780190205034.
    18. He, Xue-Zhong & Li, Youwei, 2015. "Testing of a market fraction model and power-law behaviour in the DAX 30," Journal of Empirical Finance, Elsevier, vol. 31(C), pages 1-17.
    19. Leonard Tchuindjo, 2007. "Pricing of Multi-Defaultable Bonds with a Two-Correlated-Factor Hull-White Model," Applied Mathematical Finance, Taylor & Francis Journals, vol. 14(1), pages 19-39.
    20. Brock Johnson & Jonathan Batten, 2003. "Forecasting Credit Spread Volatility: Evidence from the Japanese Eurobond Market," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 10(4), pages 335-357, December.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:phsmap:v:479:y:2017:i:c:p:324-340. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.journals.elsevier.com/physica-a-statistical-mechpplications/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.