The focus of this dissertation is the European Credit Default Swaps (CDSs) market. CDSs are the most popular credit derivative products. Three issues are discussed, the first, which is covered in chapter 2, is the investigation of non-diversifiable jump risk in iTraxx sector indices based on a multivariate model that explicitly admits discrete common jumps for an index and its components. Our empirical research shows that both the iTraxx Non-Financials and their components experience jumps during the sample period, which means that the jump risks in the iTraxx sector index are not diversifiable. The second issue, which is covered in chapter 3 is the component structure of credit default swap spreads and their determinants. We firstly extract a transitory component and a persistent component from two different maturities of the Markit iTraxx index and then regress these components against proxies for several commonly used explanatory variables. Our results show that these explanatory variables have significant but differing impacts on the extracted components, which indicates that a two-factor formulation may be needed to model CDS options. The last issue, which is covered in chapters 4, 5 and 6 is the investigation of the linkage between the credit default swap market and the equity market within the European area. We innovatively calibrate the CDS option with the Heston Model to get the implied volatility in the CDS market, which allows us to investigate both the characteristic of implied volatility in the CDS market and the relationship of the two markets not only on the level of daily changes but also with regard to its second moment. Our analysis shows that the stock market weakly leads the CDS market on daily changes but for implied volatility, the stock market leads the CDS market. A VECM analysis shows that only the stock market contributes to price discovery. For sub-investment grade entities, the interactivities between the implied volatility of the CDS market and the implied volatility of the stock market are stronger, especially during the recent credit crunch period. All these results have important implications for the construction of portfolios with credit-sensitive instruments.
| Identifer | oai:union.ndltd.org:ADTP/234035 |
| Date | January 2009 |
| Creators | Wang, Peipei, Banking & Finance, Australian School of Business, UNSW |
| Publisher | Publisher:University of New South Wales. Banking & Finance |
| Source Sets | Australiasian Digital Theses Program |
| Language | English |
| Detected Language | English |
| Rights | http://unsworks.unsw.edu.au/copyright, http://unsworks.unsw.edu.au/copyright |
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