Equities, credits and volatilities: A multivariate analysis of the European market during the subprime crisis
AbstractWe study the lead–lag dependence between aggregate credit spreads and equity prices as well as implied equity volatility, which is important for proper credit risk assessment. Our analysis includes daily quotes of the iTraxx Europe index, the Dow Jones Euro Stoxx 50 index, and the Dow Jones VStoxx index during the period of June 2004 to April 2009, i.e. before and during the subprime financial crisis. We robustly estimate a vector autoregressive (VAR) model, allow for time-varying coefficients and assume a multivariate autoregressive conditional heteroskedastic (ARCH) model of the BEKK-type for the innovations. We find that while the commonly predicted negative relation between asset prices and credit spreads holds during the pre-crisis period, it fails to hold during the subsequent crisis period. Equity returns turn out to be insignificant predictors of spreads during the crisis and spread changes significantly and positively lead changes in equity market volatility. Hence, while information in aggregate spreads is typically not driving aggregate market risk, it well may do so during a period in which severe stress in credit markets spills over to the equity market. In sum our results cast some doubt on the stability of the predictions of structural models of credit risk during periods of market stress.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal International Review of Financial Analysis.
Volume (Year): 24 (2012)
Issue (Month): C ()
Contact details of provider:
Web page: http://www.elsevier.com/locate/inca/620166
Credit risk; Credit default swaps; iTraxx index; Vector autoregression; Multivariate GARCH; BEKK;
Find related papers by JEL classification:
- G01 - Financial Economics - - General - - - Financial Crises
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Riedel, Christoph & Thuraisamy, Kannan S. & Wagner, Niklas, 2013. "Credit cycle dependent spread determinants in emerging sovereign debt markets," Emerging Markets Review, Elsevier, vol. 17(C), pages 209-223.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.