Open AccessTesting for Nonlinear Dependence in the Credit Default Swap Market
Author(s) -
Kitty Moloney,
Srinivas Raghavendra
Publication year - 2011
Publication title -
economics research international
Language(s) - English
Resource type - Journals
eISSN - 2090-2123
pISSN - 2090-2131
DOI - 10.1155/2011/708704
Subject(s) - autoregressive conditional heteroskedasticity , econometrics , nonlinear system , economics , equity (law) , bond market , bond , robustness (evolution) , credit default swap , financial economics , credit risk , volatility (finance) , actuarial science , monetary economics , finance , biochemistry , chemistry , physics , quantum mechanics , political science , law , gene
The objective of this paper is to test for nonlinear dependence in theGARCH residuals of a number of asset classes using nonlinear dynamictools. The equity and bond market samples appear to be independent onceGARCH has been applied, but evidence of nonlinear dependence in theCDS GARCH residuals is found. The sensitivity of this result is analysedby changing the specifications of the GARCH model, and the robustness ofthe result is verified by applying additional tests of nonlinearity. Evidenceof nonlinear dependence in the GARCH residuals of CDS contracts hasimplications for the accurate modeling of the marginal distribution ofthe CDS market, for pricing of CDS contracts, for estimating risk neutraldefault probabilities in the bond market, as well as for bond market hedgingstrategies