Dependence Structure of Insurance Credit Default Swaps

Mudiangombe, Benjamin and Muteba Mwamba, John Weirstrass (2019): Dependence Structure of Insurance Credit Default Swaps.

Abstract

We examine the dependence structure of insurance credit default swap (CDS) indices in the pairs of markets of the United Kingdom (UK), Eurozone (EU) and United States (US) insurance industries during the period of January 2004 to October 2018. We applied the Archimedean Clayton copula to model the lower tail and the Gumbel copula to model the upper tail of the empirical distributions. The empirical results show a significant dependence structure for both constant and time-varying copulas, implying the co-movement in the pairs of markets during the study period, influencing the contagion risk and showing strong dependence among Markets. The highest tail dependence and positive adjustment parameters seen in crisis and debt-crisis in the lower regime explains the link between these markets. The crucial findings show confirmation of asymmetric tail dependence proposing the propagation of risks of default among UK, EU and US markets. The conditional tail of the time-varying dependence structure explains the behaviour of dependence better than the constant level. This finding is robust when measuring the evolution of the dependence structure over time. The results are consistent for risk managers and investors to select the portfolio investment in different markets during stress period.

• Item Type: MPRA Paper
• Language: English
• Keywords: Dependence structure, Insurance credit default swaps, Constant and Time-varying Copulas
• Subjects: C - Mathematical and Quantitative Methods > C0 - General; C - Mathematical and Quantitative Methods > C0 - General > C01 - Econometrics; C - Mathematical and Quantitative Methods > C0 - General > C02 - Mathematical Methods; C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C63 - Computational Techniques ; Simulation Modeling; G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets

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