The Joint Credit Risk of UK Global-Systemically Important Banks

Journal of Futures Markets, 37(10), 964-988. doi:10.1002/fut.21855

51 Pages Posted: 28 Oct 2015 Last revised: 5 Mar 2019

See all articles by Mario Cerrato

Mario Cerrato

London Metropolitan University - Department of Economics, Finance and International Business (EFIB)

John Crosby

University of Maryland - Robert H. Smith School of Business

Minjoo Kim

University of Liverpool - Accounting and Finance Division

Yang Zhao

Central University of Finance and Economics (CUFE) - Chinese Academy of Finance and Development

Date Written: July 17, 2015

Abstract

We study the joint credit risk in the UK banking sector using the weekly CDS spreads of global systemically important banks over 2007-2015. We show that the time-varying and asymmetric dependence structure of the CDS spread changes is closely related to the joint default probability that two or more banks simultaneously default. We are able to flexibly measure the joint credit risk at the high-frequency level by applying the combination of the reduced-form model and the GAS-based dynamic asymmetric copula model to the CDS spreads. We also verify that much of the dependence structure of the CDS spread changes are driven by the market factors. Overall, our study demonstrates that the market factors are key inputs for the effective management of the systemic credit risk in the banking sector.

Keywords: Joint credit risk; time-varying and asymmetric dependence structure; market factors; GAS based GHST copula

JEL Classification: G32, C32

Suggested Citation

Cerrato, Mario and Crosby, John and Kim, Minjoo and Zhao, Yang, The Joint Credit Risk of UK Global-Systemically Important Banks (July 17, 2015). Journal of Futures Markets, 37(10), 964-988. doi:10.1002/fut.21855. Available at SSRN: https://ssrn.com/abstract=2681088 or http://dx.doi.org/10.2139/ssrn.2681088

Mario Cerrato

London Metropolitan University - Department of Economics, Finance and International Business (EFIB) ( email )

Economics Subject Group, LMBS
London EC2M 6SQ, EC2M 6SQ
United Kingdom

John Crosby

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States
+447979901892 (Phone)

HOME PAGE: http://www.john-crosby.co.uk/

Minjoo Kim

University of Liverpool - Accounting and Finance Division ( email )

227 Grove
Management School
Liverpool, Liverpool L69 3BX
United Kingdom

HOME PAGE: http://https://www.liverpool.ac.uk/management/staff/minjoo-kim/

Yang Zhao (Contact Author)

Central University of Finance and Economics (CUFE) - Chinese Academy of Finance and Development ( email )

39 South College Road
Beijing
China

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