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

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.