Contagion in crude oil future market and 3Y, 4Y and 5Y CDS markets for the post-Global Financial Crisis: A multivariate GARCH-cDCC approach

Abstract

This paper seeks to investigate the time-varying conditional correlations to the crude oil futures contract returns and the private Credit Default Swap market returns of Germany and France. We employ a dynamic conditional correlation (DCC) Generalized Auto Regressive Conditional Heteroskedasticity (GARCH) model to find potential contagion effects between the markets. The time under investigation is the 2011–2018 period. We focus on the CDSs of the biggest banks in Germany and France, namely: Société Générale and Deutsche Bank AG, using 3-, 4- and 5-year maturity CDSs. Empirical results show an increase in conditional correlation or contagion for the following pairs of markets: Société Générale CDS 3Y-Crude oil futures; Société Générale CDS 4Y-Crude oil futures; and Société Générale CDS 5Y-Crude oil futures for two periods (10/2014–12/2014 and 04/2017–11/2017). The results are of interest to policymakers who provide regulations for the CDS markets.

Keywords: cDCC-GARCH model, CDS market, crude oil futures market, financial contagion, dynamic conditional correlations

JEL Classification: C58, C61, G11, G15