The Impact of Stock Returns Volatility on Credit Default Swap Rates: A Copula Study

23 Pages Posted: 21 May 2005 Last revised: 5 Aug 2008

See all articles by Fathi Abid

Fathi Abid

University of Sfax, Faculty of Economic and Management Sciences, Probability & Statistics Laboratory

Nader Naifar

University of Sfax, Tunisia

Date Written: May 2005

Abstract

The aim of this paper is to study the impact of Stock returns volatility of reference entities on credit default swap rates using a new dataset from the Japanese market. The majority of empirical research suggests the inadequacy of multinormal distribution and then the failure of methods based on correlation for measuring the structure of dependency. Using a copula approach, we can model the different relationships that can exist in different ranges of behavior. We study the bivariate distributions of credit default swap rates and the measure of stock return volatility estimated with GARCH (1,1) and focus on one parameter Archimedean copula. Starting from the empirical rank correlation statistics (Kendall's tau and Spearman's rho), we estimate the parameter values of each copula function presented in our study. Then, we choose the appropriate Archimedean copula that better fit to our data. We emphasize the finding that pairs with higher rating present a weaker dependence coefficient and then, the impact of stock return volatility on credit default swap rates is higher for the lowest rating class.

Keywords: Copulas functions, credit default swap, volatility, bivariate distribution, Non-parametric estimation, Semi-parametric estimation

JEL Classification: C13, C14, C19

Suggested Citation

Abid, Fathi and Naifar, Nader, The Impact of Stock Returns Volatility on Credit Default Swap Rates: A Copula Study (May 2005). International Journal of Theoretical and Applied Finance, Vol. 8, No. 8, pp. 1135-1155, 2005. Available at SSRN: https://ssrn.com/abstract=726726 or http://dx.doi.org/10.2139/ssrn.726726

Fathi Abid (Contact Author)

University of Sfax, Faculty of Economic and Management Sciences, Probability & Statistics Laboratory ( email )

Road of Airport, Km 4
Sfax, sfax 3018
Tunisia
+216 7427 9154 (Phone)

Nader Naifar

University of Sfax, Tunisia ( email )

Road of Airport, Km 4
Sfax, sfax 3018
Tunisia

Register to save articles to
your library

Register

Paper statistics

Downloads
442
Abstract Views
2,237
rank
64,515
PlumX Metrics