Unveiling trading patterns: iTraxx Europe financials from the great financial crisis to ECB monetary easing
Autor(a) principal: | |
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Data de Publicação: | 2022 |
Outros Autores: | |
Tipo de documento: | Artigo |
Idioma: | eng |
Título da fonte: | Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) |
Texto Completo: | http://hdl.handle.net/10316/102710 https://doi.org/10.21511/bbs.17(3).2022.16 |
Resumo: | Financial stability is a statutory concern of the European Central Bank. Spreads of bank credit default swaps (CDS) indices are a reference for financial stability, but the literature is scarce in this respect. This paper poses the novel research question of which characteristics of investors in these derivatives are implied by the volatility behavior of the returns of financial CDS indices. Daily spread returns for the 5-year maturity iTraxx Europe Financials (subordinated and senior), for the period between June 2004 and March 2015, are used to estimate a GJR-M model with Student t innovations, and two MGARCH models (one with constant and the other with dynamic conditional correlations). The results show that investors in the index referring to subordinated debt are risk averse (risk premium estimate of 0.688) and liable to leverage effects, while investors in the index for senior debt do not have such characteristics. The degrees of freedom of the Student t innovations are estimated to be 4 for both indices, implying that returns have distributions with very fat tails. Population excess kurtosis diverges to infinity. The results show that the conditional correlation between the indices is dynamic. Although correlations vary widely, most of that variation occurs before the Euro Area crisis. It is concluded that the inclusion of both indices in a portfolio would be misadvised for bear markets with distressed financial entities: the correlations are always positive, above 0.75 since 2010. Moreover, both indices prove to be sensitive to the varying surrounding conditions as investors share market sentiments. |
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Unveiling trading patterns: iTraxx Europe financials from the great financial crisis to ECB monetary easingCDS indices, risk aversion, leverage effects, investor behavior, bank crisis, financial stabilityFinancial stability is a statutory concern of the European Central Bank. Spreads of bank credit default swaps (CDS) indices are a reference for financial stability, but the literature is scarce in this respect. This paper poses the novel research question of which characteristics of investors in these derivatives are implied by the volatility behavior of the returns of financial CDS indices. Daily spread returns for the 5-year maturity iTraxx Europe Financials (subordinated and senior), for the period between June 2004 and March 2015, are used to estimate a GJR-M model with Student t innovations, and two MGARCH models (one with constant and the other with dynamic conditional correlations). The results show that investors in the index referring to subordinated debt are risk averse (risk premium estimate of 0.688) and liable to leverage effects, while investors in the index for senior debt do not have such characteristics. The degrees of freedom of the Student t innovations are estimated to be 4 for both indices, implying that returns have distributions with very fat tails. Population excess kurtosis diverges to infinity. The results show that the conditional correlation between the indices is dynamic. Although correlations vary widely, most of that variation occurs before the Euro Area crisis. It is concluded that the inclusion of both indices in a portfolio would be misadvised for bear markets with distressed financial entities: the correlations are always positive, above 0.75 since 2010. Moreover, both indices prove to be sensitive to the varying surrounding conditions as investors share market sentiments.Business Perpectives2022-09-29info:eu-repo/semantics/publishedVersioninfo:eu-repo/semantics/articlehttp://hdl.handle.net/10316/102710http://hdl.handle.net/10316/102710https://doi.org/10.21511/bbs.17(3).2022.16eng1816740319917074https://www.businessperspectives.org/index.php/journals/banks-and-bank-systems/issue-414/unveiling-trading-patterns-itraxx-europe-financials-from-the-great-financial-crisis-to-ecb-monetary-easingAlberta Oliveira, MariaSantos, Carlosinfo:eu-repo/semantics/openAccessreponame:Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)instname:Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informaçãoinstacron:RCAAP2022-10-07T20:31:42Zoai:estudogeral.uc.pt:10316/102710Portal AgregadorONGhttps://www.rcaap.pt/oai/openaireopendoar:71602024-03-19T21:19:38.916321Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) - Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informaçãofalse |
dc.title.none.fl_str_mv |
Unveiling trading patterns: iTraxx Europe financials from the great financial crisis to ECB monetary easing |
title |
Unveiling trading patterns: iTraxx Europe financials from the great financial crisis to ECB monetary easing |
spellingShingle |
Unveiling trading patterns: iTraxx Europe financials from the great financial crisis to ECB monetary easing Alberta Oliveira, Maria CDS indices, risk aversion, leverage effects, investor behavior, bank crisis, financial stability |
title_short |
Unveiling trading patterns: iTraxx Europe financials from the great financial crisis to ECB monetary easing |
title_full |
Unveiling trading patterns: iTraxx Europe financials from the great financial crisis to ECB monetary easing |
title_fullStr |
Unveiling trading patterns: iTraxx Europe financials from the great financial crisis to ECB monetary easing |
title_full_unstemmed |
Unveiling trading patterns: iTraxx Europe financials from the great financial crisis to ECB monetary easing |
title_sort |
Unveiling trading patterns: iTraxx Europe financials from the great financial crisis to ECB monetary easing |
author |
Alberta Oliveira, Maria |
author_facet |
Alberta Oliveira, Maria Santos, Carlos |
author_role |
author |
author2 |
Santos, Carlos |
author2_role |
author |
dc.contributor.author.fl_str_mv |
Alberta Oliveira, Maria Santos, Carlos |
dc.subject.por.fl_str_mv |
CDS indices, risk aversion, leverage effects, investor behavior, bank crisis, financial stability |
topic |
CDS indices, risk aversion, leverage effects, investor behavior, bank crisis, financial stability |
description |
Financial stability is a statutory concern of the European Central Bank. Spreads of bank credit default swaps (CDS) indices are a reference for financial stability, but the literature is scarce in this respect. This paper poses the novel research question of which characteristics of investors in these derivatives are implied by the volatility behavior of the returns of financial CDS indices. Daily spread returns for the 5-year maturity iTraxx Europe Financials (subordinated and senior), for the period between June 2004 and March 2015, are used to estimate a GJR-M model with Student t innovations, and two MGARCH models (one with constant and the other with dynamic conditional correlations). The results show that investors in the index referring to subordinated debt are risk averse (risk premium estimate of 0.688) and liable to leverage effects, while investors in the index for senior debt do not have such characteristics. The degrees of freedom of the Student t innovations are estimated to be 4 for both indices, implying that returns have distributions with very fat tails. Population excess kurtosis diverges to infinity. The results show that the conditional correlation between the indices is dynamic. Although correlations vary widely, most of that variation occurs before the Euro Area crisis. It is concluded that the inclusion of both indices in a portfolio would be misadvised for bear markets with distressed financial entities: the correlations are always positive, above 0.75 since 2010. Moreover, both indices prove to be sensitive to the varying surrounding conditions as investors share market sentiments. |
publishDate |
2022 |
dc.date.none.fl_str_mv |
2022-09-29 |
dc.type.status.fl_str_mv |
info:eu-repo/semantics/publishedVersion |
dc.type.driver.fl_str_mv |
info:eu-repo/semantics/article |
format |
article |
status_str |
publishedVersion |
dc.identifier.uri.fl_str_mv |
http://hdl.handle.net/10316/102710 http://hdl.handle.net/10316/102710 https://doi.org/10.21511/bbs.17(3).2022.16 |
url |
http://hdl.handle.net/10316/102710 https://doi.org/10.21511/bbs.17(3).2022.16 |
dc.language.iso.fl_str_mv |
eng |
language |
eng |
dc.relation.none.fl_str_mv |
18167403 19917074 https://www.businessperspectives.org/index.php/journals/banks-and-bank-systems/issue-414/unveiling-trading-patterns-itraxx-europe-financials-from-the-great-financial-crisis-to-ecb-monetary-easing |
dc.rights.driver.fl_str_mv |
info:eu-repo/semantics/openAccess |
eu_rights_str_mv |
openAccess |
dc.publisher.none.fl_str_mv |
Business Perpectives |
publisher.none.fl_str_mv |
Business Perpectives |
dc.source.none.fl_str_mv |
reponame:Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) instname:Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informação instacron:RCAAP |
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Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informação |
instacron_str |
RCAAP |
institution |
RCAAP |
reponame_str |
Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) |
collection |
Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) |
repository.name.fl_str_mv |
Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) - Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informação |
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1799134090671161344 |