Inventi Impact: Emerging Economies
TESTING FOR NONLINEAR DEPENDENCE IN THE CREDIT DEFAULT SWAP MARKET
Kitty Moloney, Srinivas Raghavendra
The objective of this paper is to test for nonlinear dependence in the GARCH residuals of a number of asset classes using nonlinear dynamic tools. The equity and bond market samples appear to be independent once GARCH has been applied, but evidence of nonlinear dependence in the CDS GARCH residuals is found. The sensitivity of this result is analysed by changing the speci?cations of the GARCH model, and the robustness of the result is veri?ed by applying additional tests of nonlinearity. Evidence of nonlinear dependence in the GARCH residuals of CDS contracts has implications for the accurate modeling of the marginal distribution of the CDS market, for pricing of CDS contracts, for estimating risk neutral default probabilities in the bond market, as well as for bond market hedging strategies.
CC Compliant Citation: Kitty Moloney, Srinivas Raghavendra, Testing for Nonlinear Dependence in the Credit Default Swap Market,
Economics Research International, Volume 2011, Article ID 708704