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The impacts of overseas market shocks on the CDS-option basis

Yuen Jung Park, Ali M. Kutan and Doojin Ryu

The North American Journal of Economics and Finance, 2019, vol. 47, issue C, 622-636

Abstract: This study examines the domestic and foreign factors that affect the basis between equity index put options and sovereign credit default swaps (CDSs) in a leading emerging market. Here, we measure overseas market shocks by changes in US implied volatility index (VIX) and VIX futures prices. Using a unit recovery claim, we find that these shocks play a significant role in determining the domestic CDS-option basis during a crisis period, but that the exchange rate plays a greater role in a normal period. During a crisis period, variations in the US market shocks and exchange rates have a much greater impact on the domestic stock market decline than they do on the deterioration in sovereign credit quality. Furthermore, we confirm that sovereign CDS products significantly predict index put prices during a crisis period.

Keywords: Sovereign credit default swaps; KOSPI200 options; Unit recovery claim; Global financial crisis; VIX; VIX futures (search for similar items in EconPapers)
JEL-codes: G12 G14 G15 (search for similar items in EconPapers)
Date: 2019
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