ABSTRACT
The growing need for trading and hedging corporate credit risks on the investors' end has facilitated the market development of corporate credit default swaps (CDS) indices. This chapter examines the dependence structures between the three corporate CDS indices from January 3, 2005, to December 31, 2015. Three corporate CDS indices are iTraxx.Japan (IJPN), iTraxx.Europe (IEUR), and CDX.NA.IG (NAIG). IJPN, IEUR, and NAIG comprise a portfolio of equally weighted single-name CDS spreads for 50, 125, and 125 investment-grade reference entities in Japan, Europe, and the United States, respectively. The chapter provides empirical methodology in copula estimation and presents facilitates related discussions. A copula is a joint distribution function of marginal distributions, each of which is uniformly distributed. The chapter discusses two-step estimation approaches consisting of extracting and transforming the estimated standardized residuals through autoregressive-exponential general autoregressive conditional heteroskedasticity models into uniform variables and then, applying three Archimedean copula to assess the dependence structures, including upper and lower dependence.
