The Co‐Movement of Credit Default Swap Spreads, Equity Returns and Volatility: Evidence from Asia‐Pacific Markets

Abstract

We provide a comprehensive analysis of the co‐movement of credit default swap (CDS), equity, and volatility markets in four Asia‐Pacific countries at firm and index level during the period 2007–2010. First, we examine lead–lag relationships between CDS spread changes, equity returns, and changes in volatility using a vector autoregressive model. At the firm level equity returns lead changes in CDS spreads and realized volatility. However, at the index level the intertemporal linkages between the three markets are less clear‐cut. Second, we apply the measures proposed by Diebold and Yilmaz (2014) to an analysis of volatility spillovers among the CDS, equities, and volatility asset classes. The results suggest that realized volatility (at firm level) and implied volatility (at index level) are the main transmitters of cross‐market volatility spillovers. Third, we analyze the impact of various structural factors and confirm the importance of realized volatility of equity returns as a determinant of CDS spreads.

1st Politeia International Conference Proceedings. Europe at the Crossroads: Leadership, Challenges and State of Play

“…The main body of the current literature explores the linkages between CDS markets with financial markets (Lake and Apergis 2009;Belke and Gokus 2011;Fonseca and Gottschalk;Tokat 2013 investigate spillovers across two types of market, focusing on the impact of external shocks from the crude oil futures market on corn prices, examining corn cash and futures markets simultaneously. They use weekly data for a period from 2 nd January 1992 until 30 th June 2009.…”

“…US banks for the period[2006][2007][2008][2009]. By employing a BEKK-GARCH model, they capture spillover effects Fonseca and Gottschalk (2012). examine the volatility spillovers among CDS premium and equity returns for Australia, Japan, Korea and Hong Kong at firm and index level.…”

Contagion in Futures FOREX Markets for the Post- Global Financial Crisis: A Multivariate FIGARCHcDCC Approach

“…The main body of the current literature investigates the linkages between derivative markets with financial markets (Belke & Gokus 2011;Fonseca & Gottschalk;2012;Tokat 2013). Belke and Gokus (2011) examine the volatility transmission among the daily equity prices, CDS premiums and bond yields returns for four large US banks for the period [2006][2007][2008][2009].…”

“…By employing a BEKK-GARCH model, they capture spillover effects. Fonseca and Gottschalk (2012) Additionally, there are several studies investigating linkages between oil crude oil future contracts with macroeconomic figures, financial markets and commodities. (Haigh & Holt, 2002;Guo & Kliesen, 2005;Malik & Hammoudeh, 2007;Driesprong, Jacobsen, & Maat, 2008).…”

A new unique impulse response function in linear vector autoregressive models

“…Impulse response function (IRF) is one of the most important metrics based on VAR. For instance, together with the associated forecast error variance decomposition (FEVD), IRF may describe how interested finance and/or economic series react over time to exogenous impulses (Da Fonseca & Gottschalk, 2020; Scherrer & Fernandes, 2021). However, as recommended by Sims (1980), interpretable IRF usually depends on orthogonalized errors, and such a measure is known as the orthogonal IRF (OIRF).…”