Four essays on linear and extreme dependences in credit derivatives and equity markets

Hendrik Supper, Technische Universität Dortmund, Technische Universität Dortmund
2014
The dissertation investigates the linear and extreme dependence structures in credit derivatives and equity markets and studies their possible implications for asset pricing and portfolio management. Subsequent to the introduction in Chapter one, the second chapter deals with extreme dependence between the CDS spreads of major European banks and shows that the propensity of a bank to experience extreme co-movements in its CDS premia together with the market is priced in the bank's default swap
more » ... pread during the recent financial crisis. The third chapter studies linear dependence structures in the liquidity of CDS contracts and investigates the impact of commonality in CDS liquidity on the pricing of credit default swaps. The fourth chapter extends the scope of the dissertation and additionally studies the dependence structures in equity markets as well as cross-dependences between credit derivatives and equity markets. The chapter analyzes the linear and extreme dependence between stock prices, stock liquidity, and credit risk using a dynamic vine copula model and proposes a liquidity- and credit-adjusted Value-at-Risk that enables risk managers to reliably forecast the total risk exposure of a stock investment. Finally, Chapter five investigates whether the choice of extreme dependence estimator affects the assessment of tail risks and has a significant impact on the validity and economic significance of key results from recent studies in the financial economics literature.
doi:10.17877/de290r-6526 fatcat:42ur6xxanjgf7pc52cll5elgja