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Modelling the dependence structures of Australian iTraxx CDS index

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  • Jean-pierre Fenech
  • Hamed Vosgha
  • Salwa Shafik

Abstract

In contrast to market expectations, the correlation between credit default swap (CDS) spreads and their respective stock prices in Australia was found to be positive. The global financial crisis (GFC) affected the nonlinear association between the two asset classes with firms experiencing financial distress and stock prices plummeting. CDSs issuers reacted to such exogenous shocks by increasing their risk premiums on their spreads, reflecting the increased inherent risk. By splitting the data into pre- and post-GFC contexts and by employing the use of Archimedean copulas, we observe a negative co-movement in the post-GFC period. This finding is robust to several equity indices. Overall, such result is critical for investors engaging in arbitrageur activities.

Suggested Citation

  • Jean-pierre Fenech & Hamed Vosgha & Salwa Shafik, 2014. "Modelling the dependence structures of Australian iTraxx CDS index," Applied Economics, Taylor & Francis Journals, vol. 46(4), pages 420-431, February.
    • Handle: RePEc:taf:applec:v:46:y:2014:i:4:p:420-431
    DOI: 10.1080/00036846.2013.849378
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    Cited by:

    1. Gheorghe HURDUZEU & Radu Cristian MUSETESCU & Georgeta Madalina MEGHISAN, 2015. "Financial Market Reaction To Changes In The Volatilities Of Cds Returns," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(3), pages 152-165, September.
    2. Shahzad, Syed Jawad Hussain & Mensi, Walid & Hammoudeh, Shawkat & Balcilar, Mehmet & Shahbaz, Muhammad, 2018. "Distribution specific dependence and causality between industry-level U.S. credit and stock markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 52(C), pages 114-133.
    3. José Da Fonseca & Peiming Wang, 2016. "A joint analysis of market indexes in credit default swap, volatility and stock markets," Applied Economics, Taylor & Francis Journals, vol. 48(19), pages 1767-1784, April.

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