The Nexus between Sovereign CDS and Stock Market Volatility: New Evidence (original) (raw)
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Mathematics, 2020
This study complements the current literature, providing a thorough investigation of the lead–lag connection between stock indices and sovereign credit default swap (CDS) returns for 14 European countries and the US over the period 2004–2016. We use a rolling VAR framework that enables us to analyse the connection process over time covering both crisis and non-crisis periods. In addition, we analyse the relationship between stock market volatility and CDS returns. We find that the connection between the credit and equity markets does exist and that it is time variable and seems to be related to financial crises. We also observe that stock market returns anticipate sovereign CDS returns, and sovereign CDSs anticipate the conditional volatility of equity returns, closing a connectedness circle between markets. Contribution percentages in terms of returns are more intense in the US than in Europe and the opposite result is found with respect to volatilities. Within Europe, a greater im...
8th Asian Business Research Conference, ISBN: 978-1-922069-20-7, 2013
The aim of this study is to investigate the transmission of volatility between the Credit Default Swap spreads (CDS spreads) and equity returns in Turkey. In recent years, credit related instruments have been developed rapidly and since then their effect on equity markets has become the research subject. The existed literature generally concentrates on conditional means rather than conditional volatility. However, in the theoretical background, it is highly possible that the volatility in any of the two markets is usually conveyed to the other two markets. Therefore, a multivariate GARCH model is applied to data to analyze volatility contagion effect of the global financial crisis on Turkey. Although, there is not any consensus on the contagion definition, it usually refers to the markets which move more closely together during crisis periods. Thus, the data has been divided into three sub-periods; before, during and after the global financial crisis in order to show the crisis effect more clearly and if there is a volatility contagion effect during the crisis and normal periods between the CDS spreads and equity markets.
Relationship between Stock and the Sovereign CDS markets: A panel VAR based analysis
South Asian Journal of Management Sciences
This study explores the relationship between the Stock and the Sovereign Credit Default Swaps (SCDS) markets by using dataset of 36 countries.We apply Panel Vector Autoregressive (PVAR) model to gauge the impact of one market's shocks to the other. Our results decipher that changes in stock market returns explain the significant portion of the SCDS market spreads' changes. Furthermore, the magnitude of this explanation is linked with the volatility of the SCDS market. These analyses indicate that the firsthand information about the country's sovereign credit risk is contained in the respective stock market, and can be used by participants/investors to predict the SCDS market spreads.
HOW DID CDS MARKETS IMPACT STOCK MARKETS? EVIDENCE FROM LATEST FINANCIAL CRISIS
It is well-documented that financial markets become more integrated during turmoil periods. In addition, the recent global financial crisis has led to an in depth analysis and discussion of the pros and cons of derivative instruments, particularly credit default swaps, which are considered as the best proxy for firm and sovereign default risk. The aim of this study is to explore if default risk, represented by CDS spreads, is embedded in stock returns. Our main assertion rests on the idea that if CDS spreads proxy default risk, then it should have informational content for stock markets and should have a significant impact in price formation process. The analysis is conducted by using CDS Regional Index spreads and MSCI Regional Index values in Europe, Pacific Region and Emerging Markets. The results indicate that changes in CDS Regional Index spreads significantly impact stock indices within the same region as well as cross-regionally.
Revista de Métodos Cuantitativos para la Economía y la Empresa, 2018
In this paper, we explore the interconnection and existing relationships between the Sovereign Credit Default Swaps (henceforth, CDS) and the stock markets of the main European countries. Thus, the goal of this paper is to test if the CDS premia can predict the stock market returns of the most relevant economies within the Eurozone, so that, they serve as advanced indicators like mechanisms of price transmission. For this purpose, we apply the Granger Causality test to analyze ten main European stock markets from 2004 to 2016 by using daily data. Our hypothesis is proved to work for the largest economies with liquid CDS markets, whereas the transmission mechanism between CDS and stock prices is not so evident for the smallest ones.------------------------------------En este documento, exploramos la interconexion y las relaciones existentes entre los Soberanos Credit Default Swaps (en adelante, CDS) y los mercados bursatiles de los principales paises europeos. Por lo tanto, el objeti...
2015
From 2007 subprime crisis to the recent Eurozone debt crisis the European banking industry has experienced a terrible financial instability situation with increasing levels of CDS spreads (used as a proxy of credit risk). This paper investigates whether volatility transmission channels in European banking markets have changed after three significant crises’ events during the period January 2006 to March 2013. The global financial crisis is characterized by a unidirectional volatility shocks spillovers effect in credit risk from inside to outside the Eurozone. By contrast, the Eurozone debt crisis is revealed to be local in nature with the euro as the key element suggesting a market fragmentation between distressed peripheral and non-distressed core Eurozone countries, whereas retaining the local currency have acted as a firewall. With these findings we are able to shed light on the impact of the different crises on the European banking credit risk dynamics.
Sovereign bond spreads and CDS premia in the Eurozone: A causality analysis
2020
This article presents an analysis of the possible relationship between the spreads of sovereign bonds and the premia of credit default swaps (CDS) to determine whether they are useful tools for the measurement of the sovereign risk either separately or by taking into account the joint evolution of their values. The data refer to ten countries in the Eurozone along 2008–2016. By applying the causality Granger test for these variables, after six different ways of proxy, CDS premia are found to be the cause of the risk spreads in certain cases, although a bidirectional relationship is predominant in many other cases. So the CDS market contains clear and highly useful information on the sovereign risk.
2020
This paper examines the evolution of the dynamic relationship between the sovereign credit default swap (CDS) market and the sovereign bond market (ranked by maturity) during the period 2010 to 2016 to detect the direct and indirect contingent power of these products. For this purpose, our research paper proposes an ADCC-garch model. The results show that the maturity significantly affects the sensitivity of sovereign bonds to contagion. Also, while sovereign CDS present a channel of fundamental contagion, particular channels should be considered, especially for sovereign bonds with short-maturity that are very exposed to these channels.
3.VOLATILITY Transmission of Credit Default Swap (CDS) Risk Premiums
2015
The importance of the volatility transmission across the international financial markets has become a current issue by the effects of global crisis in 2008. The purpose of this study is to assign the effect of the global crisis among the Credit Default Swap (CDS) risk premium volatilities in Brazil, Russia, China, South Africa and Turkey, and which country is more effective than the others in the volatility transmission. We analyze these countries’ daily CDS returns for the period January 27th, 2003 – November 4th, 2014 by using a MGARCH model. The empirical results show that the CDS returns’ volatility has increased during the global crisis period, the source of degree of innovation is China CDS risk premium and the source of volatility transmission is Brazil and Turkey CDS risk premiums
World Scientific Book Chapters, 2021
The study of an efficient financial assets' modeling method is still an open hot issue especially during recent crises. Using credit risk data from 33 worldwide countries, this paper investigates the performance of 9 Dynamic Conditional Correlation models taking into account different properties of financial markets (long memory behavior, asymmetry and/or leverage effects...). This comparative study is based on the results of several multivariate diagnostic tests. Findings show that no model outperforms the others in all situations, though, the straightforward DCC-GARCH model seems to provide the most relevant estimator parameters. Yet, the innovations distributions assumption significantly impacts the statistical fit of the model. Our work is useful for financial markets' participants so as to making decision in terms of arbitrage, hedging or speculation.