ABSTRACT

This chapter analyzes the interdependence between the corporate credit default swap (CDS) indices of Japan, Europe, and the United States using wavelet transform. Modeling the interdependency between the corporate CDS indices is an important problem in portfolio risk management, because it is necessary to appropriately rebalance portfolios in response to fluctuations in the indices. There is a lack of research on important problems such as risk management in different cycles and the interdependency between corporate CDS indices. The chapter provides a simple outline of the analysis methods that use continuous wavelet transforms. It describes the basic characteristics of the data, and discusses the test results. Wavelet transforms are of two kinds, continuous wavelet transform (CWT) and discrete wavelet transform (DWT). There are three basic methods for analyzing the interdependence of the time and frequency domains between two time series: cross wavelet transform (XWT), wavelet coherency, and wavelet phase difference.