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Sector spillovers in credit markets

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  • Collet, Jerome
  • Ielpo, Florian

Abstract

Cross-sector volatility spillovers can both threaten the financial stability of credit markets and the diversification of a credit bond portfolio. In this article, we measure cross-sector volatility spillovers, casting light on their intensity in the US-denominated investment grade bond universe. We find that volatility spillovers are high in the US credit market and that the insurance, goods and energy sectors have been net contributors to these shocks over the 1996–2017 period. A structural analysis of the spillover history based on a three-regime multivariate VAR Markov Switching model is then proposed. It highlights that with different volatility regimes come different volatility spillover structures: the insurance and goods sectors are volatility spillover sources during crisis periods. However, according to our estimates a large portion of spillovers are non-recurring and therefore difficult to anticipate.

Suggested Citation

  • Collet, Jerome & Ielpo, Florian, 2018. "Sector spillovers in credit markets," Journal of Banking & Finance, Elsevier, vol. 94(C), pages 267-278.
  • Handle: RePEc:eee:jbfina:v:94:y:2018:i:c:p:267-278
    DOI: 10.1016/j.jbankfin.2018.07.011
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    2. Bostanci, Gorkem & Yilmaz, Kamil, 2020. "How connected is the global sovereign credit risk network?," Journal of Banking & Finance, Elsevier, vol. 113(C).
    3. Samitas, Aristeidis & Kampouris, Elias & Polyzos, Stathis, 2022. "Covid-19 pandemic and spillover effects in stock markets: A financial network approach," International Review of Financial Analysis, Elsevier, vol. 80(C).
    4. Laborda, Ricardo & Olmo, Jose, 2021. "Volatility spillover between economic sectors in financial crisis prediction: Evidence spanning the great financial crisis and Covid-19 pandemic," Research in International Business and Finance, Elsevier, vol. 57(C).
    5. Lin, Sihan & Chen, Shoudong, 2021. "Dynamic connectedness of major financial markets in China and America," International Review of Economics & Finance, Elsevier, vol. 75(C), pages 646-656.
    6. Zeng, Sheng & Liu, Xinchun & Li, Xiafei & Wei, Qi & Shang, Yue, 2019. "Information dominance among hedging assets: Evidence from return and volatility directional spillovers in time and frequency domains," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 536(C).
    7. Corbet, Shaen & Hou, Yang (Greg) & Hu, Yang & Oxley, Les, 2021. "Volatility spillovers during market supply shocks: The case of negative oil prices," Resources Policy, Elsevier, vol. 74(C).
    8. Yin, Kedong & Liu, Zhe & Jin, Xue, 2020. "Interindustry volatility spillover effects in China’s stock market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 539(C).
    9. Fu Qiao & Yan Yan, 2020. "How does stock market reflect the change in economic demand? A study on the industry-specific volatility spillover networks of China's stock market during the outbreak of COVID-19," Papers 2007.07487, arXiv.org.
    10. Ying-Ying Shen & Zhi-Qiang Jiang & Jun-Chao Ma & Gang-Jin Wang & Wei-Xing Zhou, 2022. "Sector connectedness in the Chinese stock markets," Empirical Economics, Springer, vol. 62(2), pages 825-852, February.
    11. Lai T. Hoang & Dirk G. Baur, 2021. "Spillovers and Asset Allocation," JRFM, MDPI, vol. 14(8), pages 1-31, July.
    12. Corbet, Shaen & Hou, Yang (Greg) & Hu, Yang & Oxley, Les, 2021. "An analysis of investor behaviour and information flows surrounding the negative WTI oil price futures event," Energy Economics, Elsevier, vol. 104(C).
    13. Elie Bouri, 2019. "The Effect of Jumps in the Crude Oil Market on the Sovereign Risks of Major Oil Exporters," Risks, MDPI, vol. 7(4), pages 1-15, December.

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    More about this item

    Keywords

    Credit spreads; Volatility spillovers; Credit sectors; Connectedness; Systemic risk; Markov switching; VAR;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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