Risk Spillovers in Oil-Related CDS, Stock and Credit Markets

42 Pages Posted: 29 May 2011

See all articles by Shawkat M. Hammoudeh

Shawkat M. Hammoudeh

Montpellier Business School; Drexel University - Lebow College of Business

Tengdong Liu

Drexel University - Bennett S. LeBow College of Business

Chia-Lin Chang

National Chung Hsing University - Department of Applied Economics, Department of Finance

Michael McAleer

Erasmus University Rotterdam - Erasmus School of Economics, Econometric Institute; Tinbergen Institute; University of Tokyo - Centre for International Research on the Japanese Economy (CIRJE), Faculty of Economics

Date Written: April 28, 2011

Abstract

This paper examines risk transmission and migration among six US measures of credit and market risk during the full period 2004-2011 period and the 2009-2011 recovery subperiod, with a focus on four sectors related to the highly volatile oil price. There are more long-run equilibrium risk relationships and short-run causal relationships among the four oil-related Credit Default Swaps (CDS) indexes, the (expected equity volatility) VIX index and the (swaption expected volatility) SMOVE index for the full period than for the recovery subperiod. The auto sector CDS spread is the most error-correcting in the long run and also leads in the risk discovery process in the short run. On the other hand, the CDS spread of the highly regulated, natural monopoly utility sector does not error correct. The four oil-related CDS spread indexes are responsive to VIX in the short- and long-run, while no index is sensitive to SMOVE which, in turn, unilaterally assembles risk migration from VIX. The 2007-2008 Great Recession seems to have led to “localization” and less migration of credit and market risk in the oil-related sectors.

Suggested Citation

Hammoudeh, Shawkat M. and Liu, Tengdong and Chang, Chia-Lin and McAleer, Michael, Risk Spillovers in Oil-Related CDS, Stock and Credit Markets (April 28, 2011). Available at SSRN: https://ssrn.com/abstract=1855104 or http://dx.doi.org/10.2139/ssrn.1855104

Shawkat M. Hammoudeh

Montpellier Business School ( email )

2300 Avenue des Moulins
Montpellier, 34080
France

Drexel University - Lebow College of Business ( email )

3141 Chestnut Street
Philadelphia, PA 19104
United States
2158956673 (Phone)
2158956975 (Fax)

HOME PAGE: http://faculty.lebow.drexel.edu/HammoudehS/

Tengdong Liu

Drexel University - Bennett S. LeBow College of Business ( email )

101 N. 33rd St.
Philadelphia, PA 19104
United States
2158956673 (Phone)
2159856975 (Fax)

Chia-Lin Chang (Contact Author)

National Chung Hsing University - Department of Applied Economics, Department of Finance ( email )

Taichung, Taiwan
China

Michael McAleer

Erasmus University Rotterdam - Erasmus School of Economics, Econometric Institute ( email )

Rotterdam
Netherlands

Tinbergen Institute

Rotterdam
Netherlands

University of Tokyo - Centre for International Research on the Japanese Economy (CIRJE), Faculty of Economics

Tokyo
Japan

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