Application to Financial and Economic Time Series Data

Abstract

A method for constructing a distribution-free index is applied to financial and economic time series data and causations are analyzed based on power contributions . Highlighting the current sequential financial crises, the applications focus primarily on credit default swap (CDS) markets, which often have heavy-tailed spread distributions. The first application detects that the European debt crisis has already spilled over worldwide in terms of sovereign CDS (SCDS) markets. The second application measures the impact of the US subprime crisis on Japanese domestic markets. Finally, in order to examine the usability of a distribution-free index, the clear polarization between advanced and emerging regions by GDP growth regional distribution-free indices, and the importance of examining sovereign risks in estimating the economic growth, are observed. Moreover, the Japanese SCDS distribution-free index can be regarded as an underlying SCDS spread level reflecting a domestic credit strength. These applications verify the effectiveness of a distribution-free index and confirm that applying our method to markets with insufficient information, such as fast-growing or immature markets, can be effective.