# Persistence of Bank Credit Default Swap Spreads

^{†}

## Abstract

**:**

## 1. Introduction

## 2. Data

## 3. Covariance Stationary versus Unit Root

## 4. Cointegration

## 5. Conclusions

## Funding

## Conflicts of Interest

## Abbreviations

ADF | Augmented Dickey–Fuller |

AR | Autoregressive |

BAC | Bank of America |

C | Citigroup |

CDS | Credit default swaps |

GLS | Generalized least squares |

G-SIFI | Global systemically important financial institution |

GS | Goldman Sachs |

JPM | J.P. Morgan Chase |

KPSS | Kwiatkowski–Phillips–Schmidt–Shin |

LM | Lagrange multiplier |

MA | Moving average |

MS | Morgan Stanley |

NP | Ng and Perron |

OLS | Ordinary least squares |

PN | Perron and Ng |

PP | Phillips–Perron |

SNRFOR | Senior foreign (unsecured) |

WFC | Wells Fargo |

XR | Ex-restructuring |

## Appendix A

#### Appendix A.1.

#### Appendix A.2.

#### Appendix A.3.

## References

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1 | We thank an anonymous referee for this suggestion. |

2 | The other two U.S. G-SIFI banks are the Bank of New York Mellon Corporation and State Street. However, their CDS contracts are sparsely traded. Fortunately, they are not as large as the six sample banks. To strike a balance between accurate time-series analysis and reasonable systemic risk analysis outcomes, we chose the six sample banks from the eight U.S. G-SIFI banks. |

Simulated Critical Values | |||||||
---|---|---|---|---|---|---|---|

Sample size T = 4000 | |||||||

Sig. level | 0.010 | 0.025 | 0.050 | 0.075 | 0.100 | 0.125 | 0.150 |

${Z}_{\rho}$ | −29.4 | −25.1 | −21.8 | −19.8 | −18.3 | −17.2 | −16.2 |

t | −3.97 | −3.66 | −3.42 | −3.26 | −3.13 | −3.03 | −2.95 |

F | 8.26 | 7.11 | 6.26 | 5.73 | 5.34 | 5.03 | 4.78 |

$LM$ | 0.22 | 0.18 | 0.15 | 0.13 | 0.12 | 0.11 | 0.10 |

Sample size T = 5000 | |||||||

Sig. level | 0.010 | 0.025 | 0.050 | 0.075 | 0.100 | 0.125 | 0.150 |

${Z}_{\rho}$ | −29.5 | −25.1 | −21.7 | −19.8 | −18.3 | −17.1 | −16.2 |

t | −3.97 | −3.66 | −3.41 | −3.25 | −3.13 | −3.03 | −2.94 |

F | 8.32 | 7.14 | 6.24 | 5.71 | 5.33 | 5.03 | 4.76 |

$LM$ | 0.22 | 0.18 | 0.15 | 0.13 | 0.12 | 0.11 | 0.10 |

Computed Test Statistics | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|

Log CDS Spreads | Raw CDS Spreads | |||||||||||

ADF Tests | PP Tests | KPSS Test | ADF Tests | PP Tests | KPSS Test | |||||||

${\mathit{Z}}_{\mathit{\rho}}$ | $\mathit{t}$ | $\mathit{F}$ | ${\mathit{Z}}_{\mathit{\rho}}$ | $\mathit{t}$ | $\mathit{LM}$ | ${\mathit{Z}}_{\mathit{\rho}}$ | $\mathit{t}$ | $\mathit{F}$ | ${\mathit{Z}}_{\mathit{\rho}}$ | $\mathit{t}$ | $\mathit{LM}$ | |

BAC | −4.36 | −1.38 | 1.05 | −5.77 | −1.63 | 7.75 *** | −10.47 | −2.19 | 2.50 | −15.64 | −2.75 | 7.69 *** |

C | −4.85 | −1.46 | 1.20 | −5.57 | −1.60 | 7.33 *** | −12.98 | −2.45 | 3.09 | −19.24 * | −3.08 | 7.35 *** |

GS | −6.69 | −1.73 | 1.55 | −8.81 | −2.04 | 7.54 *** | −12.21 | −2.36 | 2.87 | −25.37 ** | −3.54 ** | 6.80 *** |

JPM | −12.93 | −2.48 | 3.10 | −12.74 | −2.48 | 5.18 *** | −14.21 | −2.54 | 3.30 | −28.02 ** | −3.71 ** | 5.77 *** |

MS | −5.63 | −1.57 | 1.42 | −7.33 | −1.84 | 7.97 *** | −18.46 * | −2.91 | 4.30 | −48.79 *** | −4.94 *** | 6.33 *** |

WFC | −7.97 | −1.97 | 1.94 | −8.03 | −2.00 | 6.55 *** | −13.33 | −2.50 | 3.17 | −26.55 ** | −3.63 ** | 7.72 *** |

Simulated Critical Values | |||||||
---|---|---|---|---|---|---|---|

Sample size T = 4000 | |||||||

Sig. level | 0.010 | 0.025 | 0.050 | 0.075 | 0.100 | 0.125 | 0.150 |

$M{Z}_{\alpha}^{GLS}$ | −23.0 | −19.1 | −16.1 | −14.4 | −13.1 | −12.1 | −11.3 |

$MS{B}^{GLS}$ | 0.147 | 0.161 | 0.175 | 0.185 | 0.193 | 0.200 | 0.207 |

$M{Z}_{t}^{GLS}$ | −3.37 | −3.07 | −2.82 | −2.66 | −2.54 | −2.44 | −2.35 |

Sample size T = 5000 | |||||||

Sig. level | 0.010 | 0.025 | 0.050 | 0.075 | 0.100 | 0.125 | 0.150 |

$M{Z}_{\alpha}^{GLS}$ | −23.6 | −19.6 | −16.5 | −14.7 | −13.4 | −12.5 | −11.6 |

$MS{B}^{GLS}$ | 0.144 | 0.158 | 0.171 | 0.181 | 0.189 | 0.196 | 0.203 |

$M{Z}_{t}^{GLS}$ | −3.41 | −3.10 | −2.84 | −2.68 | −2.56 | −2.45 | −2.37 |

Computed Test Statistics | ||||||||
---|---|---|---|---|---|---|---|---|

Log CDS Spreads | Raw CDS Spreads | |||||||

${\mathit{MZ}}_{\mathit{\alpha}}^{\mathit{GLS}}$ | ${\mathit{MSB}}^{\mathit{GLS}}$ | ${\mathit{MZ}}_{\mathit{t}}^{\mathit{GLS}}$ | k | ${\mathit{MZ}}_{\mathit{\alpha}}^{\mathit{GLS}}$ | ${\mathit{MSB}}^{\mathit{GLS}}$ | ${\mathit{MZ}}_{\mathit{t}}^{\mathit{GLS}}$ | k | |

BAC | −6.03 | 0.28 | −1.70 | 9 | −10.46 | 0.22 | −2.25 | 25 |

C | −5.04 | 0.31 | −1.55 | 29 | −11.85 | 0.20 | −2.40 | 30 |

GS | −6.64 | 0.27 | −1.79 | 29 | −12.07 | 0.20 | −2.42 | 29 |

JPM | −12.02 | 0.20 | −2.43 | 12 | −14.84 * | 0.18 * | −2.69 * | 29 |

MS | −5.36 | 0.30 | −1.59 | 27 | −20.63 ** | 0.15 ** | −3.19 ** | 31 |

WFC | −7.93 | 0.25 | −1.99 | 19 | −13.16 * | 0.19 | −2.55 * | 30 |

Simulated Critical Values | |||||||
---|---|---|---|---|---|---|---|

Sample size T = 4000 | |||||||

Sig. level | 0.010 | 0.025 | 0.050 | 0.075 | 0.100 | 0.125 | 0.150 |

${Z}_{\rho}$ | −28.3 | −24.0 | −20.6 | −18.6 | −17.2 | −16.0 | −15.1 |

t | −3.91 | −3.60 | −3.35 | −3.18 | −3.05 | −2.95 | −2.85 |

Sample size T = 5000 | |||||||

Sig. level | 0.010 | 0.025 | 0.050 | 0.075 | 0.100 | 0.125 | 0.150 |

${Z}_{\rho}$ | −28.4 | −24.1 | −20.7 | −18.7 | −17.2 | −16.1 | −15.1 |

t | −3.91 | −3.62 | −3.35 | −3.18 | −3.06 | −2.95 | −2.86 |

Computed Test Statistics | ||||||
---|---|---|---|---|---|---|

Augmented Dickey–Fuller Tests | ||||||

BAC | C | GS | JPM | MS | WFC | |

BAC | - | −2.91 | −4.32 *** | −3.48 ** | −3.68 ** | −3.11 |

C | −17.90 | - | −3.65 ** | −3.43 ** | −3.45 ** | −4.02 *** |

GS | −43.28 *** | −26.98 ** | - | −3.76 ** | −4.31 *** | −3.63 ** |

JPM | −25.01 ** | −25.57 ** | −30.43 *** | - | −4.15 *** | −3.52 ** |

MS | −30.44 *** | −26.32 ** | −38.78 *** | −37.08 *** | - | −3.77 ** |

WFC | −20.34 * | −35.83 *** | −30.32 *** | −25.58 ** | −31.42 *** | - |

Phillips–Perron Tests | ||||||

BAC | C | GS | JPM | MS | WFC | |

BAC | - | −4.27 *** | −4.97 *** | −3.80 ** | −4.21 *** | −3.56 ** |

C | −35.69 *** | - | −4.35 *** | −4.09 *** | −4.05 *** | −5.16 *** |

GS | −48.93 *** | −36.77 *** | - | −4.38 *** | −5.77 *** | −3.75 ** |

JPM | −28.88 ** | −33.28 *** | −37.60 *** | - | −4.36 *** | −3.78 ** |

MS | −35.16 *** | −33.09 *** | −64.74 *** | −37.75 *** | - | −3.68 ** |

WFC | −25.50 ** | −52.48 *** | −28.87 ** | −28.91 ** | −28.23 ** | - |

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**MDPI and ACS Style**

Huang, X.
Persistence of Bank Credit Default Swap Spreads. *Risks* **2019**, *7*, 90.
https://doi.org/10.3390/risks7030090

**AMA Style**

Huang X.
Persistence of Bank Credit Default Swap Spreads. *Risks*. 2019; 7(3):90.
https://doi.org/10.3390/risks7030090

**Chicago/Turabian Style**

Huang, Xin.
2019. "Persistence of Bank Credit Default Swap Spreads" *Risks* 7, no. 3: 90.
https://doi.org/10.3390/risks7030090