Regime switching dynamics in credit default swaps: Evidence from smooth transition autoregressive model

Yi-Hou Huang*, Wen Cheng Hu

*Corresponding author for this work

Research output: Contribution to journalArticle

8 Scopus citations

Abstract

This paper investigates the dynamics of credit default swap (CDS) spread. We first find auto-correlations and cross-correlations of the CDS series and the CDS average by employing detrended cross-correlation analysis (DCCA). We then employ smooth transition autoregressive (STAR) models to characterize the regime switching behavior of 28 US corporate CDS series from January 2007 through October 2009. In each case, we find clear evidence for transitions between low-price and high-price regimes. The threshold estimations of the STAR model effectively differentiate the price regimes, where the first transition consistently coincides with the explosion of the crisis in late 2008.

Original languageEnglish
Pages (from-to)1497-1508
Number of pages12
JournalPhysica A: Statistical Mechanics and its Applications
Volume391
Issue number4
DOIs
StatePublished - 15 Feb 2012

Keywords

  • Credit default swap
  • Detrended cross-correlations analysis
  • Financial crisis
  • Smooth transition autoregressive model

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