The Co-movement of Credit Default Swap Spreads, Stock Market Returns and Volatilities: Evidence from Asia-Pacific Markets

Abstract

We study the co-movement of credit and equity markets in four Asia-Pacific countries at firm and index level. First, we establish realized volatility as an important determinant of CDS spread levels and changes. Second, we examine lead-lag relationships between CDS spreads, volatility and stock returns using a vector-autoregressive model. At the firm level stock returns lead the other variables. However, at the index level volatility and CDS spreads are equally important. Third, we analyze volatility spillovers using the measures proposed by Diebold and Yilmaz (2011). The results suggest that realized volatility is the main contributor to cross-market volatility spillovers.

Keywords: Credit Risk, Credit Default Swap, High-Frequency Data, Realized Volatility, Granger Causality, Volatility Spillover Effects

JEL Classification: G12, G13, C13