Bayesian dynamic linear modeling for exploring the impact of recent financial crisis on Japan Credit Default Swap market

Jiashen You, Tomohiro Ando

Research output: Contribution to journalArticle

3 Citations (Scopus)

Abstract

This paper investigates the effects of recent subprime financial crisis on Japan Credit Default Swap (CDS) market. We first analyze the relationship between the log return series of the reference rates of a CDS contract and the hazard rate. This provides a theoretical foundation for the use of correlation of the log CDS returns as a representation of credit risk correlation. In the dynamic Bayesian linear modeling framework, we consider an algorithm that allow us to obtain dynamic Bayesian updates for the correlation among the reference rates of an underlying CDS contract. Data from the Japan CDS market is analyzed using the proposed methodology. An empirical analyses on the data segmented by different economic environments are carried out. Results indicate that the estimated implied default correlation captures market structure very well and provides useful information for credit risk management.

Original languageEnglish
Pages (from-to)8718-8725
Number of pages8
JournalExpert Systems With Applications
Volume39
Issue number10
DOIs
Publication statusPublished - 2012 Aug 1

Keywords

  • Bayesian time series
  • Credit default swap
  • Default correlation

ASJC Scopus subject areas

  • Engineering(all)
  • Computer Science Applications
  • Artificial Intelligence

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