Financial Market

Sovereign CDS Auction

Credit default swap (CDS) auction uses a two-stage process to facilitate cash settlement following a credit event. The initial market midpoint (IMM), net open interest (NOI), and adjustment amounts are set in the first stage. The final auction price which is used for cash settling the CDS contracts is determined in the second stage. I studied the results of sovereign CDS auctions from January 2009 to August 2020 and find that there were on average 11 dealers in each sovereign CDS auction. 50% of the auctions had sell-NOIs. The typical credit event was Failure to Pay. The most common value of bid-offer spread was 2, and the most common value of quotation amount was $2 million. Majority of the sovereign CDS auctions contained penalties. The final auction prices were between 20 to 40.
See the results of sovereign CDS acutions below (Jan 2009 – Dec 2023) 
  • Please find my paper: Sovereign CDS Auction here.

CDS Trading and Manipulation

There are several ways in manipulation “naked” CDS. The first way is through demand-based price pressure. The second source of manipulation is from the misleading price information, which requires the manipulator to first short a large amount of the underlying bond, then overpay for a small amount of CDS protection. I test whether the Greek speculation is raising from the second source of manipulation and found that the Greek manipulation is raising from the mis-leading price information. Moreover, there is a positive market reaction of the weekly traded gross notional amount and number of traded contracts the day before the announcement and a decline market activity afterwards.
  • Please find my paper: Sovereign CDS Trading and Manipulation here.

Crude Oil Price Co-movements: A Revisit

I investigated the dependence structure among WTI, Brend, and NEX using copula models. Model is implemented using ARMA(p,q)-EGARCH(1,1)-t for the marginal distributions and five time-invariant copula models for the joint distribution. We find evidence of symmetric tail dependence. Moreover, copula results show the tail dependence between crude oil returns is stronger than the tail dependence between the returns of crude oil and new energy global innovation index. Our findings are useful for portfolio diversification and risk management.
  •  Please find my paper: Crude Oil Price Co-movements: A revisit here.
  • Please find the corresponding Matlab code here.

Network Approach to Interbank Market

We survey the recent literature, which studies the system stability under different interbank network formations. I include some stylized and important theoretical papers, which provide the economic meaning of the interbank markets, uncertainty source, and moral hazard problem under the simple network structure. Complex and dynamic network formations are also considered, where banks are strategic and not identical in terms of size and credit condition. 
  •  Please find my paper: Network Approach to Interbank Market: A Survey here.

Sovereign CDS Contract

Sovereign credit default swap contract, like other CDS contracts, performs similar to an insurance. The denominated currency is one of the main differences between the corporate CDS contract and sovereign CDS contract. The denominated currency of a sovereign CDS contract is a foreign currency rather than its domestic currency. The credit events applicable to the standard sovereign CDS contracts include Failure to Pay, Restructuring, and Repudiation/Moratorium. There are two sovereign CDS bans in history: The 2010/2011 German Temporary Ban and The 2012 EU Permanent Ban.
  •  Please find my paper: Sovereign CDS Contract here.

VaR and Expected Shortfall

Value-at-risk (VaR) and expected shortfall (ES) are both risk meaures, so why we need to introduce ES when we already have VaR? The reason is that ES gives us a more complete picture of the losses (shape of the tail). In other words, expected shortfall is a more robust risk measure comparing to the VaR.
Nowadays, most programs can directly calculate VaR and ES values for us, but the usefulness of the results depends on what kind of model we use to fit the sample. In addition, it is important to keep in mind that if we choose to use the historical data to predict future returns. Then, sample selection becomes extremely important, especially in times of crisis.
  •  Please find my paper: VaR and Expected Shortfall here.
  • Please find the corresponding code (Python, Matlab, R) here: here, here, here.

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