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A joint analysis of market indexes in credit default swap, volatility and stock markets

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  • José Da Fonseca
  • Peiming Wang

Abstract

This paper analyses the joint dynamics of the CDS, volatility and stock markets using both VAR and Markov regime-switching VAR models with market index data. It shows that the joint behaviour of the three markets is better characterized by the Markov model with two regimes corresponding to low- and high-volatile market conditions. The relationship between changes in the market indexes under a regime is consistent with theory and persistent; the information transmission process of shocks to the markets is similar for the two regimes with a more important role for CDS shock; and the volatility in the money market is an important determinant of regime-switching. The findings have practical implications, particularly for hedging strategies with market indexes under different market conditions.

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  • José Da Fonseca & Peiming Wang, 2016. "A joint analysis of market indexes in credit default swap, volatility and stock markets," Applied Economics, Taylor & Francis Journals, vol. 48(19), pages 1767-1784, April.
    • Handle: RePEc:taf:applec:v:48:y:2016:i:19:p:1767-1784
    DOI: 10.1080/00036846.2015.1109036
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    References listed on IDEAS

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    7. Naifar, Nader, 2012. "Modeling the dependence structure between default risk premium, equity return volatility and the jump risk: Evidence from a financial crisis," Economic Modelling, Elsevier, vol. 29(2), pages 119-131.
    8. 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.
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    Cited by:

    1. Chen, Steven Shu-Hsiu, 2024. "Volatility feedback and dealership position: Evidence from the CDS Index, Corporate Bonds, and Government Bonds," Finance Research Letters, Elsevier, vol. 69(PB).
    2. Kai Zheng & Weidong Xu & Xili Zhang, 2023. "Multivariate Regime Switching Model Estimation and Asset Allocation," Computational Economics, Springer;Society for Computational Economics, vol. 61(1), pages 165-196, January.
    3. Shahzad, Syed Jawad Hussain & Mensi, Walid & Hammoudeh, Shawkat & Balcilar, Mehmet & Shahbaz, Muhammad, 2018. "Distribution specific dependence and causality between industry-level U.S. credit and stock markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 52(C), pages 114-133.
    4. Saker Sabkha & Christian Peretti & Dorra Hmaied, 2019. "On the informational market efficiency of the worldwide sovereign credit default swaps," Journal of Asset Management, Palgrave Macmillan, vol. 20(7), pages 581-608, December.

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