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Credit default swaps drawup networks: Too interconnected to be stable?


Kaushik, Rahul; Battiston, Stefano (2013). Credit default swaps drawup networks: Too interconnected to be stable? PLoS ONE, 8(7):e61815.

Abstract

We analyse time series of CDS spreads for a set of major US and European institutions in a period overlapping the recent financial crisis. We extend the existing methodology of -drawdowns to the one of joint -drawups, in order to estimate the conditional probabilities of spike-like co-movements among pairs of spreads. After correcting for randomness and finite size effects, we find that, depending on the period of time, 50% of the pairs or more exhibit high probabilities of joint drawups and the majority of spread series are trend-reinforced, i.e. drawups tend to be followed by drawups in the same series. We then carry out a network analysis by taking the probability of joint drawups as a proxy of financial dependencies among institutions. We introduce two novel centrality-like measures that offer insights on how both the systemic impact of each node as well as its vulnerability to other nodes' shocks evolve in time.

We analyse time series of CDS spreads for a set of major US and European institutions in a period overlapping the recent financial crisis. We extend the existing methodology of -drawdowns to the one of joint -drawups, in order to estimate the conditional probabilities of spike-like co-movements among pairs of spreads. After correcting for randomness and finite size effects, we find that, depending on the period of time, 50% of the pairs or more exhibit high probabilities of joint drawups and the majority of spread series are trend-reinforced, i.e. drawups tend to be followed by drawups in the same series. We then carry out a network analysis by taking the probability of joint drawups as a proxy of financial dependencies among institutions. We introduce two novel centrality-like measures that offer insights on how both the systemic impact of each node as well as its vulnerability to other nodes' shocks evolve in time.

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10 citations in Web of Science®
2 citations in Scopus®
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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:2013
Deposited On:03 Mar 2015 16:26
Last Modified:27 Jul 2016 07:24
Publisher:Public Library of Science (PLoS)
ISSN:1932-6203
Free access at:Publisher DOI. An embargo period may apply.
Publisher DOI:https://doi.org/10.1371/journal.pone.0061815
PubMed ID:23843931
Other Identification Number:merlin-id:10162
Permanent URL: https://doi.org/10.5167/uzh-108288

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