Time-Varying Systemic Risk: Evidence from a Dynamic Copula Model of CDS Spreads

Loading...
Thumbnail Image

Date

2013-05-23

Journal Title

Journal ISSN

Volume Title

Repository Usage Stats

169
views
1683
downloads

Abstract

This paper proposes a new class of copula-based dynamic models for high dimension conditional distributions, facilitating the estimation of a wide variety of measures of systemic risk. Our proposed models draw on successful ideas from the literature on modeling high dimension covariance matrices and on recent work on models for general time-varying distributions. Our use of copula-based models enable the estimation of the joint model in stages, greatly reducing the computational burden. We use the proposed new models to study a collection of daily credit default swap (CDS) spreads on 100 U.S. firms over the period 2006 to 2012. We find that while the probability of distress for individual firms has greatly reduced since the financial crisis of 2008-09, the joint probability of distress (a measure of systemic risk) is substantially higher now than in the pre-crisis period.

Department

Description

Provenance

Citation

Scholars@Duke

Patton

Andrew J. Patton

Zelter Family Distinguished Professor

Patton’s research interests lie in financial econometrics, with an emphasis on forecasting volatility and dependence, forecast evaluation methods, high frequency financial data, and the analysis of hedge funds and mutual funds. His research has appeared in a variety of academic journals, including the Journal of Finance, Journal of Financial Economics, Review of Financial Studies, Econometrica, Journal of Econometrics, and the Journal of the American Statistical Association. He has given hundreds of invited seminars around the world, at universities, central banks, and other institutions. A complete list of his current and past research is available at: http://econ.duke.edu/~ap172/research.html


Unless otherwise indicated, scholarly articles published by Duke faculty members are made available here with a CC-BY-NC (Creative Commons Attribution Non-Commercial) license, as enabled by the Duke Open Access Policy. If you wish to use the materials in ways not already permitted under CC-BY-NC, please consult the copyright owner. Other materials are made available here through the author’s grant of a non-exclusive license to make their work openly accessible.