ABSTRACT
This chapter examines the co-movement of credit default swap (CDS) spreads of Eurozone banks, employing the dynamic equicorrelation (DECO) model developed by R. Engle and B. Kelly. It discusses the latest DECO approach enables to efficiently analyze correlation dynamics among the whole set of banks. This method, which assumes the same correlation across all variables contemporaneously, avoids the difficulty of interpreting pair-wise correlations derived from the conventional dynamic conditional correlation (DCC) model of Engle. The chapter examines the autoregressive (AR) model to identify key economic factors explaining the movement of the estimated equicorrelation. Volatility is highest for Banco Comercial Portuguese and lowest for Deutsche Bank. A high level of kurtosis for many of the banks indicates leptokurtic distributions, which have heavier tails and acute peaks. The banks' CDS spreads displayed a high level of co-movement even before the financial crises, inferring the existence of common risks perceived with regard to the Eurozone banking sector as a whole.
