Sector Spillovers in Credit Markets

16 Pages Posted: 25 Jan 2017

See all articles by Jerome Collet

Jerome Collet

Lombard Odier Darier Hentsch & Cie - Lombard Odier Investment Management

Florian Ielpo

Université Paris I Panthéon-Sorbonne - Centre d'Economie de la Sorbonne (CES); Unigestion

Date Written: January 24, 2017

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 use Diebold and Yilmaz (2009, 2011, 2012)?s method to 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 and that the insurance and the consumer noncyclical sectors have been large volatility spillover contributors over the 2000-2014 period. We propose a more structural analysis of the spillover history, based on a three regime multivariate VAR Markov Switching model that highlights that with different volatility regimes come different volatility spillover structures: the insurance sector is a volatility spillover source during crisis periods, when the consumer non-cyclical sector becomes one during quieter periods.

Keywords: Credit spreads, volatility spillovers, credit sectors, connectedness, systemic risk, markov switchin

JEL Classification: G120, G140

Suggested Citation

Collet, Jerome and Ielpo, Florian, Sector Spillovers in Credit Markets (January 24, 2017). Available at SSRN: https://ssrn.com/abstract=2904974 or http://dx.doi.org/10.2139/ssrn.2904974

Jerome Collet

Lombard Odier Darier Hentsch & Cie - Lombard Odier Investment Management ( email )

Queensberry House
3 Old Burlington Street
London, W1S 3AB
United Kingdom

Florian Ielpo (Contact Author)

Université Paris I Panthéon-Sorbonne - Centre d'Economie de la Sorbonne (CES) ( email )

106-112 Boulevard de l'hopital
106-112 Boulevard de l'Hôpital
Paris Cedex 13, 75647
France

Unigestion ( email )

8c, avenue de Champel CP 387
CP 387
Genève 12, CH 1211
Switzerland

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