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

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Author Info

  • Shawkat Hammoudeh

    (Lebow College of Business, Drexel University)

  • Tengdong Liu

    (Lebow College of Business, Drexel University)

  • Chia-Lin Chang

    (Department of Applied Economics, Department of Finance, National Chung Hsing University)

  • Michael McAleer

    (Erasmus University Rotterdam, Tinbergen Institute, The Netherlands, Complutense University of Madrid, and Institute of Economic Research, Kyoto University)

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 Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 772.

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Length: 41pages
Date of creation: Apr 2011
Date of revision:
Handle: RePEc:kyo:wpaper:772

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Keywords: Risk; Sectoral CDS; VIX; SMOVE; MOVE; Adjustments.;

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Cited by:
  1. 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.
  2. Massimiliano Caporin & Michael McAleer, 2013. "Ten Things You Should Know About the Dynamic Conditional Correlation Representation," KIER Working Papers, Kyoto University, Institute of Economic Research 870, Kyoto University, Institute of Economic Research.
  3. Massimiliano Caporin & Michael McAleer, 2013. "Ten Things You Should Know About DCC," KIER Working Papers, Kyoto University, Institute of Economic Research 854, Kyoto University, Institute of Economic Research.
  4. Massimiliano Caporin & Michael McAleer, 2013. "Ten Things you should know about DCC," Tinbergen Institute Discussion Papers 13-048/III, Tinbergen Institute.
  5. Duc Khuong Nguyen & Ricardo M. Sousa & Gazi Salah Uddin, 2014. "Testing for asymmetric causality from U.S. equity returns to commodity futures returns," Working Papers, Department of Research, Ipag Business School 2014-545, Department of Research, Ipag Business School.

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