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Risk Spillovers in Oil-Related CDS, Stock and Credit Markets

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  • Hammoudeh, S.M.
  • Liu, T.
  • Chang, C-L.
  • McAleer, M.J.

Abstract

This paper examines risk transmission and migration among six US measures of credit and market risk during the full period 2004-2011 period and the 2009-2011 recovery subperiod, with a focus on four sectors related to the highly volatile oil price. There are more long-run equilibrium risk relationships and short-run causal relationships among the four oil-related Credit Default Swaps (CDS) indexes, the (expected equity volatility) VIX index and the (swaption expected volatility) SMOVE index for the full period than for the recovery subperiod. The auto sector CDS spread is the most error-correcting in the long run and also leads in the risk discovery process in the short run. On the other hand, the CDS spread of the highly regulated, natural monopoly utility sector does not error correct. The four oil-related CDS spread indexes are responsive to VIX in the short- and long-run, while no index is sensitive to SMOVE which, in turn, unilaterally assembles risk migration from VIX. The 2007-2008 Great Recession seems to have led to “localization” and less migration of credit and market risk in the oil-related sectors.

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Bibliographic Info

Paper provided by Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute in its series Econometric Institute Research Papers with number EI 2011-15.

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Date of creation: 27 Apr 2011
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Handle: RePEc:ems:eureir:23120

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Keywords: MOVE; SMOVE; VIX; adjustments; risk; sectoral CDS;

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Cited by:
  1. Massimiliano Caporin & Michael McAleer, 2013. "Ten Things You Should Know About DCC," KIER Working Papers 854, Kyoto University, Institute of Economic Research.
  2. Massimiliano Caporin & Michael McAleer, 2013. "Ten Things You Should Know About the Dynamic Conditional Correlation Representation," Working Papers in Economics 13/21, University of Canterbury, Department of Economics and Finance.
  3. Massimiliano Caporin & Michael McAleer, 2013. "Ten Things you should know about DCC," Tinbergen Institute Discussion Papers 13-048/III, Tinbergen Institute.
  4. Blumenstock, Hendrik & von Grone, Udo & Mehlhorn, Marc & Merkl, Johannes & Pietz, Marcus, 2012. "Einflussfaktoren von CDS-Spreads als Maß für das aktuelle Bonitätsrisiko: Liefert das Rating eine Erklärung?," Bayreuth Working Papers on Finance, Accounting and Taxation (FAcT-Papers) 2012-03, University of Bayreuth, Chair of Finance and Banking.

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