LINKAGES BETWEEN FINANCIAL CREDIT DEFAULT SWAP (CDS) SECTORS: A FOCUS ON EU-USA-UK MARKETS

Abstract

This study has examined the dynamic relationships between the United States (US) – Europe (EU) – United Kingdom (UK) five-year financial credit default swap (CDS) sector index spreads for the banking and insurance sector. The data used for this work comprised of the daily data on five-year CDS indexes from January 1, 2004 to February 2, 2015.  This study has used 5-time varying copulas (Gaussian, Student, Gumbel, Frank and Symmetrical Gumbel) for data analysis. The data was split into two sub sample periods, which were before crisis and after crisis. The result of this work has shown that US insurance CDS was the most effected among the other regions, due to the direct relationship with the US bank CDS. Furthermore, the result has shown that the fall of the US market has contributed to the fall of the other global financial markets. In addition, results have shown that the linkage between sectorial CDS markets for US, UK and EU is connected and correlated.