Long-memory in volatilities of CDS spreads: Evidences from the emerging markets

Abstract

In this study, we analyze the long-memory dependency in volatility of CDS spreads of four emerging markets (Turkey, Russia, South Africa, and Brazil) from 2001 to 2014. Preliminary evidence from Detrended Fluctuations Analysis (DFA) suggests the existence of long memory in all markets. We then use the fractionally integrated generalized autoregressive conditional heteroskedasticity (FIGARCH) model to estimate the magnitudes of the long-memory parameter. Following the information of modified ICSS test, the Adaptive FIGARCH (A-FIGARCH) and the Time-Varying FIGARCH (TV-FIGARCH) are also employed to control for the potential effects of structural breaks. The results are generally robust with those obtained from the FIGARCH model. The significant long-memory suggests that the Efficient Market Hypothesis (EMH) may not hold for the CDS spreads of those four countries.