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Examining the efficiency and interdependence of US credit and stock markets through MF-DFA and MF-DXA approaches

Syed Jawad Hussain Shahzad (), Safwan Mohd Nor, Walid Mensi and Ronald Kumar ()

Physica A: Statistical Mechanics and its Applications, 2017, vol. 471, issue C, 351-363

Abstract: This study examines the power law properties of 11 US credit and stock markets at the industry level. We use multifractal detrended fluctuation analysis (MF-DFA) and multifractal detrended cross-correlation analysis (MF-DXA) to first investigate the relative efficiency of credit and stock markets and then evaluate the mutual interdependence between CDS-equity market pairs. The scaling exponents of the MF-DFA approach suggest that CDS markets are relatively more inefficient than their equity counterparts. However, Banks and Financial credit markets are relatively more efficient. Basic Materials (both CDS and equity indices) is the most inefficient sector of the US economy. The cross-correlation exponents obtained through MF-DXA also suggest that the relationship of the CDS and equity sectors within and across markets is multifractal for all pairs. Within the CDS market, Basic Materials is the most dependent sector, whereas equity market sectors can be divided into two distinct groups based on interdependence. The pair-wise dependence between Basic Materials sector CDSs and the equity index is also the highest. The degree of cross-correlation shows that the sectoral pairs of CDS and equity markets belong to a persistent cross-correlated series within selected time intervals.

Keywords: Credit markets; Stock markets; Efficiency; Cross-correlation; MF-DXA (search for similar items in EconPapers)
JEL-codes: G1 G14 G17 (search for similar items in EconPapers)
Date: 2017
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