Solutions Shreve Chapter 3
Empirical Finance 4.2 – Case 3
Julinda Kllapi, 2514073, j.kllapi@student.vu.nl
Valkana Lesseva, 1836994, v.h.lesseva@student.vu.nl
Introduction
The recent financial crisis saw CDS spreads soaring across the Euro area as the full picture behind the public finances of many European countries became apparent. As a result many countries, such as Portugal and Ireland lined up for a bailout from the rest of the Eurozone as they found it harder and prohibitively expensive to borrow from the international markets. We take into consideration the development of CDS spreads of one such country, Greece, and of a Greek financial institution, the Alpha Bank, and use an ARMA-GARCH design to model the heteroskedasticity in both of these series. The input from a range of some important auxiliary tests is also taken into account.
The report has the following structure. Section two describes the data. On the other hand, the empirical analysis and interpretation of the results is conducted in section three. Finally, the last section concludes.
Data
In our analysis, we employ data collected from Thompson Reuters’ Datastream on 5-year CDS spreads of Greece and Alpha Bank, an important Greek financial institution. The data we gathered cover the period from 1 January 2008 until 31 December 2010, and obviously the frequency of the data is daily. Table 1 provides a multitude of informative key descriptive statistics.
Table 1. Descriptive statistics of the 5 Year CDS spreads of (i) a sovereign, Greece, and (ii) a financial institution, Alpha Bank. All numbers are in basis points. | Spread_Greece | Spread_AlphaBank | Mean | 298.419 | 468.322 | Median | 162.36 | 445.32 | Maximum | 979.72 | 998.29 | Minimum | 21.9 | 142.5 | Standard Deviation | 291.152 | 270.977 | Skewness | 1.066 | 0.372 | Kurtosis | 2.631 | 1.709 | Observations | 784 | 663 |
The maximum spread during the period under consideration is reached at approx. 980 basis points for the
Julinda Kllapi, 2514073, j.kllapi@student.vu.nl
Valkana Lesseva, 1836994, v.h.lesseva@student.vu.nl
Introduction
The recent financial crisis saw CDS spreads soaring across the Euro area as the full picture behind the public finances of many European countries became apparent. As a result many countries, such as Portugal and Ireland lined up for a bailout from the rest of the Eurozone as they found it harder and prohibitively expensive to borrow from the international markets. We take into consideration the development of CDS spreads of one such country, Greece, and of a Greek financial institution, the Alpha Bank, and use an ARMA-GARCH design to model the heteroskedasticity in both of these series. The input from a range of some important auxiliary tests is also taken into account.
The report has the following structure. Section two describes the data. On the other hand, the empirical analysis and interpretation of the results is conducted in section three. Finally, the last section concludes.
Data
In our analysis, we employ data collected from Thompson Reuters’ Datastream on 5-year CDS spreads of Greece and Alpha Bank, an important Greek financial institution. The data we gathered cover the period from 1 January 2008 until 31 December 2010, and obviously the frequency of the data is daily. Table 1 provides a multitude of informative key descriptive statistics.
Table 1. Descriptive statistics of the 5 Year CDS spreads of (i) a sovereign, Greece, and (ii) a financial institution, Alpha Bank. All numbers are in basis points. | Spread_Greece | Spread_AlphaBank | Mean | 298.419 | 468.322 | Median | 162.36 | 445.32 | Maximum | 979.72 | 998.29 | Minimum | 21.9 | 142.5 | Standard Deviation | 291.152 | 270.977 | Skewness | 1.066 | 0.372 | Kurtosis | 2.631 | 1.709 | Observations | 784 | 663 |
The maximum spread during the period under consideration is reached at approx. 980 basis points for the