Tail Dependence of Eurozone Sovereign CDS Spreads

Abstract

Using a flexible threshold copula model, we investigate the pairwise tail dependence of Eurozone sovereign credit default swap spreads during the period 2008-2013 and we detect clusters of credit default swaps with high tail dependence. Our approach is also useful to inspect the evolution of the loss distribution, as we prove by computing a theoretical portfolio based on Clayton and Gumbel copula for the highest values of the association parameters estimated by the model.

Keywords: copula, credit default swaps, tail dependence, loss portfolio distribution

JEL Classification: G12, G01