Sector Spillovers in Credit Markets

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