Dynamic Linkages in Credit Risk: Modeling the Time-Varying Correlation between the Money and Derivatives Markets over the Crisis Period

Journal article


Wu, W. and McMillan, D. (2013). Dynamic Linkages in Credit Risk: Modeling the Time-Varying Correlation between the Money and Derivatives Markets over the Crisis Period. Journal of Risk. 16 (2), p. 51–59. https://doi.org/10.21314/JOR.2013.270
AuthorsWu, W. and McMillan, D.
Abstract

This paper examines the dynamic linkages in credit risk between the money market and the derivatives market during 2004–9. We use the T-bill–Eurodollar (TED) spread to measure credit risk in the money market and the credit default swap (CDS) index spread for the derivatives market. The linkages are measured by a dynamic conditional correlation–Glosten–Jagannathan–Runkle–generalized auto regressive conditional heteroscedasticity model. The results show that the correlation between the TED spread and the CDS index spread fluctuated around zero prior to the crisis. While the correlation increased before the crisis, it moved notably higher during the crisis. Finally, the correlation fell in early 2009 but persisted at a level between 0.05 and 0.1, higher than the precrisis period.

KeywordsCredit Risk, CDS, TED Spread
Year2013
JournalJournal of Risk
Journal citation16 (2), p. 51–59
PublisherInfopro Digital Services
ISSN1755-2842
Digital Object Identifier (DOI)https://doi.org/10.21314/JOR.2013.270
Web address (URL)https://www.risk.net/journal-of-risk/2316815/dynamic-linkages-in-credit-risk-modeling-the-time-varying-correlation-between-the-money-and-derivatives-markets-over-the-crisis-period
Publication dates
PrintDec 2013
Publication process dates
Accepted04 Mar 2013
Deposited22 Feb 2024
Accepted author manuscript
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Open
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