Authors: Rahul Kaushik*, Stefano Battiston

Abstract:

\begin{abstract} We analyse time series of CDS spreads for a set of major US and European institutions on a period overlapping the recent financial crisis. We extend the existing methodology of \emph{$\varepsilon$-drawdowns} to the one of \emph{joint $\varepsilon$-drawups}, in order to estimate the conditional probabilities of abrupt co-movements among spreads. We correct for randomness and for finite size effects and we find statistically significant probabilities of joint drawups for many pairs of CDS. We also find significant probabilities of trend reinforcement, i.e. drawups in a given CDS followed by drawups in the same CDS. Finally, we take the matrix of probability of joint drawups as an estimate of the network of financial dependencies among institutions. We then carry out a network analysis that provides insights into the role of systemically important financial institutions. \end{abstract}

Keywords: Credit Default Swaps, epsilon drawups, interdependence, trend-reinforcement, network analysis, bow-tie structure, time series analysis

Manuscript status:

JEL codes:
PACS numbers:

Local copy of the paper: ETH-RC-12-013.pdf

Submission date: 6-8-2012

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