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CDS Industrial Sector Indices, credit and liquidity risk

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  • Monica Billio

    ()
    (Department of Economics, University Of Venice Cà Foscari)

  • Massimiliano Caporin
  • Loriana Pelizzon

    ()
    (Department of Economics, University Of Venice Cà Foscari)

  • Domenico Sartore

    ()
    (Department of Economics, University Of Venice Cà Foscari)

Abstract

This paper studies the risk spillover among US Industrial Sectors and focuses on the connection between credit and liquidity risks. The proposed methodology is based on quantile regressions and considers the movements of CDS Industrial Sector Indices depending on common risk factors such as equity risk, risk appetite, term spread and TED spread. We use CDS Industrial indexes and the market risk factor to identify the impact of market liquidity risk and market credit risk in the different US Industries and give evidence of the heterogeneity of this relation. We show that all the sectors are largely exposed to the non investment grade bond spread indicating that credit risk is largely a common factor rather than a sector specific factor. With a lower impact, we also find that market risk and interest rate risk are also common factors, as well as liquidity risk. These results indicate that diversification among sectors might collapse when credit, equity and liquidity events hit the market. The information extracted from CDS market could thus provide relevant information for sector allocation strategies.

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File URL: http://www.unive.it/media/allegato/DIP/Economia/Working_papers/Working_papers_2012/WP_DSE_billio_caporin_pelizzon_sartore_09_12.pdf
File Function: First version, 2012
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Bibliographic Info

Paper provided by Department of Economics, University of Venice "Ca' Foscari" in its series Working Papers with number 2012_09.

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Length: 26
Date of creation: 2012
Date of revision:
Handle: RePEc:ven:wpaper:2012_09

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Keywords: Credit Risk; Common factors; liquidity risk;

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  1. Koenker, Roger & Zhao, Quanshui, 1996. "Conditional Quantile Estimation and Inference for Arch Models," Econometric Theory, Cambridge University Press, Cambridge University Press, vol. 12(05), pages 793-813, December.
  2. Paolo Mauro & Yishay Yafeh & Nathan Sussman, 2001. "Emerging Market Spreads: Then Versus Now," OFRC Working Papers Series, Oxford Financial Research Centre 2001fe03, Oxford Financial Research Centre.
  3. François Longin, 2001. "Extreme Correlation of International Equity Markets," Journal of Finance, American Finance Association, American Finance Association, vol. 56(2), pages 649-676, 04.
  4. Koenker, Roger & Bassett, Gilbert, Jr, 1982. "Robust Tests for Heteroscedasticity Based on Regression Quantiles," Econometrica, Econometric Society, Econometric Society, vol. 50(1), pages 43-61, January.
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