nep-ifn New Economics Papers
on International Finance
Issue of 2015‒12‒01
one paper chosen by
Vimal Balasubramaniam
University of Oxford

  1. Correlated Defaults of UK Banks: Dynamics and Asymmetries By Mario Cerrato; John Crosby; Minjoo Kim; Yang Zhao

  1. By: Mario Cerrato; John Crosby; Minjoo Kim; Yang Zhao
    Abstract: We document asymmetric and time-varying features of dependence between the credit risks of global systemically important banks (G-SIBs) in the UK banking industry using a CDS dataset. We model the dependence of CDS spreads using a dynamic asymmetric cop- ula. Comparing our model with traditional copula models, we find that they usually under- estimate the probability of joint (or conditional) default in the UK G-SIBs. Furthermore, we show that dynamics and asymmetries between CDS spreads are closely associated with the probabilities of joint (or conditional) default through the extensive regression analysis. Especially, our regression analysis provides a policy implication that copula correlation or tail dependence coefficients are able to be leading indicators for the systemic credit event.
    Keywords: Calibrated marginal default probability, probability of joint default, probability of conditional default, GAS-based GHST copula.
    JEL: C32 G32
    Date: 2015–10

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