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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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File URL: http://www.kier.kyoto-u.ac.jp/DP/DP772.pdf
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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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  1. William R. Emmons & Frank A. Schmid, 2004. "Monetary policy actions and the incentive to invest," Working Papers 2004-018, Federal Reserve Bank of St. Louis.
  2. Ericsson, Jan & Jacobs, Kris & Oviedo, Rodolfo, 2009. "The Determinants of Credit Default Swap Premia," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(01), pages 109-132, February.
  3. Duffie, Darrell & Singleton, Kenneth J, 1999. "Modeling Term Structures of Defaultable Bonds," Review of Financial Studies, Society for Financial Studies, vol. 12(4), pages 687-720.
  4. Ralf Becker & Adam Clements & Andrew McClelland, 2008. "The Jump component of S&P 500 volatility and the VIX index," NCER Working Paper Series 24, National Centre for Econometric Research.
  5. Roberto Blanco & Simon Brennan & Ian W. Marsh, 2005. "An Empirical Analysis of the Dynamic Relation between Investment-Grade Bonds and Credit Default Swaps," Journal of Finance, American Finance Association, vol. 60(5), pages 2255-2281, October.
  6. Marcelo Fernandes & Marcelo Cunha Medeiros & MArcelo Scharth, 2007. "Modeling and predicting the CBOE market volatility index," Textos para discussão 548, Department of Economics PUC-Rio (Brazil).
  7. Acharya, Viral V & Johnson, Tim, 2005. "Insider Trading in Credit Derivatives," CEPR Discussion Papers 5180, C.E.P.R. Discussion Papers.
  8. Fathi Abid & Nader Naifar, 2006. "Credit-default swap rates and equity volatility: a nonlinear relationship," Journal of Risk Finance, Emerald Group Publishing, vol. 7(4), pages 348-371, August.
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Cited by:
  1. Massimiliano Caporin & Michael McAleer, 2013. "Ten Things You Should Know About DCC," Documentos del Instituto Complutense de Análisis Económico 2013-12, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales.
  2. Massimiliano Caporin & Michael McAleer, 2013. "Ten Things you should know about the Dynamic Conditional Correlation Representation," Tinbergen Institute Discussion Papers 13-078/III, Tinbergen Institute.
  3. Massimiliano Caporin & Michael McAleer, 2013. "Ten Things you should know about DCC," Tinbergen Institute Discussion Papers 13-048/III, Tinbergen Institute.

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