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Authors: Toro, Daniel
Advisors: Carmona, Rene
Department: Operations Research and Financial Engineering
Class Year: 2016
Abstract: This thesis studies the role of contagion in the process of price discovery in Latin American sovereign debt markets. In particular, it analyses CDS returns on 5-yr sovereign paper for Brazil, Mexico, Colombia and Chile. By fitting univariate Hawkes processes to regional CDS returns, it quantifies clustering behavior of abnormal regional returns, studies the degree to which self-excitation provides a better model than those relying on constant background intensities, and tests for risk-averse investor behavior documented in global capital markets. Furthermore, this paper fits DCC-GARCH models to CDS returns for every country pair in the region to arrive at daily estimates for conditional correlations. Using the 2008 global financial crisis as a natural event of abnormal credit stress in Latin America, the study compares conditional correlation trajectories before and after the crisis to detect changes in the credit pricing process. This thesis finds that there is meaningful clustering of abnormal CDS returns across Brazil, Mexico, Colombia and Chile. The study also concludes that conditional correlation values increased markedly after the 2008 global financial crisis. Coupled with relatively constant underlying credit fundamentals, this provides evidence for an increased contagion effect Post-2008.
Extent: 75 pages
Type of Material: Princeton University Senior Theses
Language: en_US
Appears in Collections:Operations Research and Financial Engineering, 2000-2017

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