Volatility relation between credit default swap and stock market: new empirical tests

Miroslav Mateev ()

Journal of Economics and Finance, 2019, vol. 43, issue 4, No 3, 712 pages

Abstract: Abstract This paper investigates the relation between volatility of CDS and stock prices using a sample of 109 European investment-grade companies, during the period of January 2012 to January 2016. To analyse the volatility relation between CDS and stock prices and its time persistence, we use the Dynamic Conditional Correlation (DCC) model. We also test the volatility spillover hypothesis and investigate the direction of the spillover effect using the BEKK-GARCH model. We find strong evidence in support of the hypothesis that the volatility of CDS and stock prices across European investment-grade companies can be modelled under the dynamic conditional correlation assumption. When we split the volatility into two components, namely, ARCH-effect (that is, short-run persistence of shocks) and GARCH-effect (that is, long-run persistence), we find that, in general, the persistence of correlation is statistically significant, while the impact of innovations (shocks) on correlation is not. Our tests of the volatility spillover hypothesis provide new evidence that the volatility spillover is bi-directional, with the predominant leadership of the European CDS market over the stock market.

Keywords: Credit default swap; iTraxx index; Volatility spillover; Multivariate GARCH (search for similar items in EconPapers)
JEL-codes: C58 G10 G12 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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DOI: 10.1007/s12197-018-9467-5

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