ABSTRACT

This chapter investigates the dependence structure of the credit default swap (CDS) indices of the insurance sectors in the United States, the European Union (EU), and the United Kingdom, using daily data from January 2, 2004, to June 30, 2013. CDS indices, which consist of a portfolio of single-name swaps, provide the liquid market prices of credit risks in different sectors. The chapter aims to study the relationships among insurance sector CDS indices across countries. It examines whether the degree of co-movements changed during the global credit crisis that originated in the United States and the European sovereign debt crisis that originated in Greece. The chapter provides a two-step estimation approach for copula models, following the methodology adopted by R. Aloui et al. It introduces the copula function and discusses empirical model for marginal distributions. The chapter provides several alternative copula models of conditional dependence structures and explains their estimation and testing methods.