Credit Default Swaps and Stock Prices: Further Evidence within and Across Markets from Mean and Volatility Transmission with a MVGARCH-M Model and Newer Data
27 Pages Posted: 19 Jan 2009
Date Written: January 19, 2009
The goal of this paper is to investigate empirically the association between the stock market and the credit default swap (CDS) market in terms of mean as well as volatility spillovers. Making use of 1612 daily observations from four stock markets, i.e., US, German, UK and Greek markets, as well as from two European CDS indices along with the methodology of the error correction (EC) and the multivariable generalized heteroskedasticity in mean (MVGARCH-M) modelling, the empirical findings yield: stock returns across European and US markets are negatively related to European CDS spread changes, the CDS market seems to lead the stock market, implying that information contents coming from the firm's environment seems first to have an impact on the CDS market and next to the stock market, and stock market volatility exerts a positive impact on CDS spreads.
Keywords: stock market, CDS market, mean and volatility spillovers, EC and MVGARCH-M models
JEL Classification: G10, G14, C32
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