The conditional dependence structure of banking sector credit default swap indices

Abstract

In this paper, we study whether the dependence structure changed during the global credit crisis and the European sovereign debt crisis between credit default swap (CDS) indices of the EU, UK, USA and Asia banking sectors. The analysis encompasses three time periods: a credit crisis period (from 14 December 2007 to 31 October 2009); a debt crisis period (from 1 November 2009 to 28 June 2013) and a post-crisis period (29 June 203 to 17 February 2015) and focuses exclusively on bank sector. We use a copula-TGARCH approach. We find that the rank correlation coefficients, for all the index pairs, increased during the credit and debt crisis periods, exhibiting a contagion effect in the credit risks of the bank sector across countries. Indeed, during the crises period, the Gumbel copula found to best fit specifically, asymmetric tail dependence is found for EU-USA and ASIA-UK pair, suggesting the possibility of large simultaneous losses.