Factor decomposition of the Eurozone sovereign CDS spreads

Fabozzi, Frank J.; Giacometti, Rosella; Tsuchida, Naoshi

doi:10.1016/j.jimonfin.2016.03.003

Cited by 44 publications

(26 citation statements)

References 22 publications

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“…The analysis of commonality associated with economically based country groupings and the adoption of a multilevel model is new in the literature. A further work linked to our analysis is that of Fabozzi et al (2016), who employ PCA and independent component analysis over a collection of European sovereign spreads. Their purpose is to evaluate the evolution of risk in the CDS market building on the role of the latent factors.…”

Section: Introductionmentioning

confidence: 99%

“…Their purpose is to evaluate the evolution of risk in the CDS market building on the role of the latent factors. In our work, to further highlight the different views provided by multilevel models and principal components, we take a step in a direction close to that of Fabozzi et al (2016), still focusing on the risk dimension, but from a different angle. In fact, we will show which is the role of principal components and latent factors extracted from a multilevel model in generating the risk of portfolios built with sovereign CDS.…”

Section: Introductionmentioning

confidence: 99%

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A multilevel factor approach for the analysis of CDS commonality and risk contribution

Rodríguez-Caballero

Caporin

2019

Journal of International Financial Markets, Institutions and Mo

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We introduce a novel multilevel factor model that allows for the presence of global and pervasive factors, local factors and semi-pervasive factors, and that captures common features across subsets of the variables of interest. We develop a model estimation procedure and provide a simulation experiment addressing the consistency of our proposal. We complete the analyses by showing how our multilevel model might explain on the commonality across CDS premiums at the global level. In this respect, we cluster countries by either the Debt/GDP ratio or by sovereign ratings. We show that multilevel models are easier to interpret compared with factor models based on principal component analysis. Finally, we experiment how the multilevel model might allow the recovery of the risk contribution due to the latent factors within a basket of country CDS.

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Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

A multilevel factor approach for the analysis of CDS commonality and risk contribution

Rodríguez-Caballero

Caporin

2019

Journal of International Financial Markets, Institutions and Mo

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“…The lion's share of research goes to corporate CDS, but attention turned recently to the sovereign market as well. We do not review the extensive body of knowledge and refer readers to the survey and discussion on future prospects by Augustin et al (2014Augustin et al ( , 2016, and the recent work on sovereign CDS by Fabozzi et al (2016).…”

Section: Introductionmentioning

confidence: 99%

Portfolio diversification in the sovereign credit swap markets

Consiglio¹,

Lotfi

Zenios

2017

Ann Oper Res

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We develop models for portfolio diversification in the sovereign credit default swaps (CDS) markets and show that, despite literature findings that sovereign CDS spreads are affected by global factors, there is sufficient idiosyncratic risk to be diversified. However, we identify regime switching in the times series of CDS spreads and spread returns, and the optimal diversified strategies can be regime dependent. The developed models trade off the CVaR risk measure against expected return, consistently with the statistical properties of spreads. We consider three investment strategies suited for different CDS market participants: for investors with long positions, speculators that hold uncovered long and short positions, and hedgers with covered long and short exposures. We use the models to illustrate that diversification pays in the CDS market. The models are also tested for active portfolio management in Eurozone core and periphery, and Central, Eastern and South-Eastern Europe countries, and the optimized portfolio results outperform the broad S&P/ISDA Eurozone Developed Nation Sovereign CDS index. The paper concludes by identifying open questions in developing integrated enterprise-wide risk management models using CDS.

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“…What is this paper's incremental contribution to the literature? First, we study for effects that existed in the equity markets during the European financial crisis, which were (quite surprisingly) not sufficiently examined in the previous literature, which typically studies for ‘contagion’ effects on sovereign bonds and CDS markets (Missio and Watzka, ; Missio and Watzka, ; Metiu, ; Abad et al ., ; Gündüz and Kaya, ; Fabozzi et al ., ; Banerjee et al ., ). The study of equity markets is significant, since they are the most liquid markets and have the highest trading volume.…”

Section: Introductionmentioning

confidence: 99%