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An analysis of the relationship between the sovereign credit default swaps and the stock market of Pakistan through handling outliers

Author

Listed:
  • Falik shear

    (NUST Business School)

  • Hilal Anwar Butt

    (IBA)

  • Imtiaz Badshah

    (NUST Business School)

Abstract

This study examines the relationship between the Sovereign Credit Default Swap (SCDS) market and Karachi Stock Exchange (KSE). Previous literature in this lieu rarely handles the effect of outliers? presence in data. This study applies Split Sample Skewness Based Boxplot (SSSBB) technique for outlier detection and proposes SSSBB-Winsorization for handling outliers. The results depict a significant role of outliers in the determination of the correlation and causal relationship between these markets. Findings suggest a negative and statistically significant correlation between SCDS and KSE, which is increasing gradually. Moreover, by using Granger causality test, this study finds bidirectional causality between both the markets, which implies informational efficiency of both markets in the prediction of each other.

Suggested Citation

  • Falik shear & Hilal Anwar Butt & Imtiaz Badshah, 2017. "An analysis of the relationship between the sovereign credit default swaps and the stock market of Pakistan through handling outliers," Proceedings of Economics and Finance Conferences 4807486, International Institute of Social and Economic Sciences.
    • Handle: RePEc:sek:iefpro:4807486
    as

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    File URL: https://iises.net/proceedings/8th-economics-finance-conference-london/table-of-content/detail?cid=48&iid=010&rid=7486
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    References listed on IDEAS

    as
    1. Akbar, Muhammad & Nguyen, Thuy Thu, 2016. "The explanatory power of higher moment capital asset pricing model in the Karachi stock exchange," Research in International Business and Finance, Elsevier, vol. 36(C), pages 241-253.
    2. Lars Norden & Martin Weber, 2009. "The Co†movement of Credit Default Swap, Bond and Stock Markets: an Empirical Analysis," European Financial Management, European Financial Management Association, vol. 15(3), pages 529-562, June.
    3. Eyssell, Thomas & Fung, Hung-Gay & Zhang, Gaiyan, 2013. "Determinants and price discovery of China sovereign credit default swaps," China Economic Review, Elsevier, vol. 24(C), pages 1-15.
    4. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-438, July.
    5. Don H Kim & Mico Loretan & Eli M Remolona, 2010. "Contagion and risk premia in the amplification of crisis: evidence from Asian names in the global CDS market," BIS Papers chapters, in: Bank for International Settlements (ed.), The international financial crisis and policy challenges in Asia and the Pacific, volume 52, pages 318-339, Bank for International Settlements.
    6. Mr. Jorge A Chan-Lau & Ms. Yoon Sook Kim, 2004. "Equity Prices, Credit Default Swaps, and Bond Spreads in Emerging Markets," IMF Working Papers 2004/027, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

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