A copula-based Markov reward approach to the credit spread in the European Union

DOI10.1080/1350486X.2019.1702068MaRDI QIDQ5207796zbMATH OpenOpenAlexWikidataFDO

Authors Guglielmo D'Amico, Filippo Petroni, Philippe Regnault, Stefania Scocchera, Loriano Storchi

Publication date 13 January 2020

Published in Applied Mathematical Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1902.00691

zbMATH Keywords

change-pointcopuladynamic measure of inequalityMarkov processsovereign credit rating

Mathematics Subject Classification ID

Characterization and structure theory for multivariate probability distributions; copulas (62H05) Applications of statistics to actuarial sciences and financial mathematics (62P05) Credit risk (91G40) Financial networks (including contagion, systemic risk, regulation) (91G45)

Abstract: In this paper, we propose a methodology based on piece-wise homogeneous Markov chain for credit ratings and a multivariate model of the credit spreads to evaluate the financial risk in European Union (EU). Two main aspects are considered: how the financial risk is distributed among the European countries and how large is the value of the total risk. The first aspect is evaluated by means of the expected value of a dynamic entropy measure. The second one is solved by computing the evolution of the total credit spread over time. Moreover, the covariance between countries' total spread allows understand any contagions in EU. The methodology is applied to real data of 24 countries for the three major agencies: Moody's, Standard and Poor's, and Fitch. Obtained results suggest that both the financial risk inequality and the value of the total risk increase over time at a different rate depending on the rating agency and that the dependence structure is characterized by a strong correlation between most of European countries.

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Cites work

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Cited in

(4)

• Interdependencies between CDS spreads in the European union: is Greece the black sheep or black swan?
• Estimating redenomination risk under Gumbel-Hougaard survival copulas
• A NON-HOMOGENEOUS SEMI-MARKOV REWARD MODEL FOR THE CREDIT SPREAD COMPUTATION
• Randentropy: a software to measure inequality in random systems

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