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Equities, credits and volatilities: A multivariate analysis of the European market during the subprime crisis


  • Schreiber, Irene
  • Müller, Gernot
  • Klüppelberg, Claudia
  • Wagner, Niklas


We study the lead–lag dependence between aggregate credit spreads and equity prices as well as implied equity volatility, which is important for proper credit risk assessment. Our analysis includes daily quotes of the iTraxx Europe index, the Dow Jones Euro Stoxx 50 index, and the Dow Jones VStoxx index during the period of June 2004 to April 2009, i.e. before and during the subprime financial crisis. We robustly estimate a vector autoregressive (VAR) model, allow for time-varying coefficients and assume a multivariate autoregressive conditional heteroskedastic (ARCH) model of the BEKK-type for the innovations. We find that while the commonly predicted negative relation between asset prices and credit spreads holds during the pre-crisis period, it fails to hold during the subsequent crisis period. Equity returns turn out to be insignificant predictors of spreads during the crisis and spread changes significantly and positively lead changes in equity market volatility. Hence, while information in aggregate spreads is typically not driving aggregate market risk, it well may do so during a period in which severe stress in credit markets spills over to the equity market. In sum our results cast some doubt on the stability of the predictions of structural models of credit risk during periods of market stress.

Suggested Citation

  • Schreiber, Irene & Müller, Gernot & Klüppelberg, Claudia & Wagner, Niklas, 2012. "Equities, credits and volatilities: A multivariate analysis of the European market during the subprime crisis," International Review of Financial Analysis, Elsevier, vol. 24(C), pages 57-65.
  • Handle: RePEc:eee:finana:v:24:y:2012:i:c:p:57-65
    DOI: 10.1016/j.irfa.2012.07.006

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    References listed on IDEAS

    1. Bollerslev, Tim & Engle, Robert F & Wooldridge, Jeffrey M, 1988. "A Capital Asset Pricing Model with Time-Varying Covariances," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 116-131, February.
    2. Engle, Robert F. & Kroner, Kenneth F., 1995. "Multivariate Simultaneous Generalized ARCH," Econometric Theory, Cambridge University Press, vol. 11(01), pages 122-150, February.
    3. Houweling, Patrick & Vorst, Ton, 2005. "Pricing default swaps: Empirical evidence," Journal of International Money and Finance, Elsevier, vol. 24(8), pages 1200-1225, December.
    4. 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.
    5. Comte, F. & Lieberman, O., 2003. "Asymptotic theory for multivariate GARCH processes," Journal of Multivariate Analysis, Elsevier, vol. 84(1), pages 61-84, January.
    6. Carol Alexander & Andreas Kaeck, 2006. "Regimes in CDS Spreads: A Markov Switching Model of iTraxx Europe Indices," ICMA Centre Discussion Papers in Finance icma-dp2006-08, Henley Business School, Reading University.
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    Cited by:

    1. repec:zbw:rwirep:0243 is not listed on IDEAS
    2. Ansgar Belke & Christian Gokus, 2011. "Volatility Patterns of CDS, Bond and Stock Markets before and during the Financial Crisis: Evidence from Major Financial Institutions," Discussion Papers of DIW Berlin 1107, DIW Berlin, German Institute for Economic Research.
    3. Wasim Ahmad & N.R. Bhanumurthy & Sanjay Sehgal, 2014. "The Eurozone crisis and its contagion effects on the European stock markets," Studies in Economics and Finance, Emerald Group Publishing, vol. 31(3), pages 325-352, July.
    4. Ansgar Belke & Christian Gokus, 2011. "Volatility Patterns of CDS, Bond and Stock Markets Before and During the Financial Crisis – Evidence from Major Financial Institutions," Ruhr Economic Papers 0243, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    5. Riedel, Christoph & Thuraisamy, Kannan S. & Wagner, Niklas, 2013. "Credit cycle dependent spread determinants in emerging sovereign debt markets," Emerging Markets Review, Elsevier, vol. 17(C), pages 209-223.

    More about this item


    Credit risk; Credit default swaps; iTraxx index; Vector autoregression; Multivariate GARCH; BEKK;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models


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