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On the interplay between US sectoral CDS, stock and VIX indices: Fresh insights from wavelet approaches

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  • Shahzad, Syed Jawad Hussain
  • Aloui, Chaker
  • Jammazi, Rania

Abstract

In this study, we examine the time and frequency connectedness between CDS-stock and CDS-VIX pairs as well as combinations of the three indices for eleven US sectors. The main novelty of the present study is the use of bivariate and multivariate wavelet approaches to explore credit risk hedging and arbitrage opportunities. The findings point to a significantly changing pattern in the dynamic linkage between the given assets in the time–frequency domain. A strong negative (positive) association is unveiled in the long-term horizon for CDS-stock (CDS-VIX) pairs. Three markets seem disconnected in the utilities and industrial sectors and highly connected in the cyclical sectors such as basic materials. The implications of the findings are discussed.

Suggested Citation

  • Shahzad, Syed Jawad Hussain & Aloui, Chaker & Jammazi, Rania, 2020. "On the interplay between US sectoral CDS, stock and VIX indices: Fresh insights from wavelet approaches," Finance Research Letters, Elsevier, vol. 33(C).
    • Handle: RePEc:eee:finlet:v:33:y:2020:i:c:s1544612319300777
    DOI: 10.1016/j.frl.2019.06.006
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    More about this item

    Keywords

    Credit default swaps; Stock markets; Volatility index; Wavelet squared coherence;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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