WORLD FINANCIAL RELATIONS: UNDERSTANDING THE CREDIT DERIVATIVE SWAPS (CDS) DEPENDENCE STRUCTURE

RELACIONES FINANCIERAS INTERNACIONALES: ENTENDIENDO LA ESTRUCTURA DE DEPENDENCIA DE LOS CREDIT DERIVATIVE SWAPS (CDS)

RELAÇÕES FINANCEIRAS INTERNACIONAIS: ENTENDENDO A ESTRUTURA DE DEPENDÊNCIA DOS CREDIT DERIVATIVE SWAPS (CDS)

ABSTRACT

This study investigates the copula model that best fit to model the dependence structure of Credit Derivative Swaps (CDS) spreads. For the analysis, we consider daily data from the period of January 1, 2009 to December 31, 2014. Regarding the models, we considered Vine copulas and Hierarchical Archimedean copulas, and different families of copulas. Our results indicate that C-Vine copulas, as well Student t family, demonstrated better performance, according to the criteria used to get the dependence structure. The best fit of the dependence structure can avoid the model risk, from the use of an incorrect model.

Credit Derivative Swaps; Model risk; Vine Copulas