The link between regional CDS spreads and equity returns: a multivariate GARCH approach

Christian Manicaro ()
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Christian Manicaro: University of Malta

SN Business & Economics, 2022, vol. 2, issue 2, 1-15

Abstract: Abstract This paper analyses correlation dynamics, leverage effects and volatility transmission across the regions under study for the credit default swap spreads and equity markets. Analysis is made on 72 sectors and 139 sub-sectors for the period between January 2008 and June 2017. The sample was divided between crisis and after-crisis period and three Multivariate GARCH models are used to assess correlation, leverage effects and volatility transmissions across the regions under study. Results show that there is evidence of time-varying correlation between regions both in the short run and long run, and that dynamics are strong during the crisis period. In addition, asymmetric effects are present between regions for a particular asset class but there is no clear indication that negative news have more impact than positive news. Finally, in the US and the EU, the equity market seem to be more influential in terms of cross-volatility persistence than the credit default swap market.

Keywords: Credit default swap spreads; Equity returns; Conditional correlation; Leverage effects; Volatility transmission; Regional contagion (search for similar items in EconPapers)
JEL-codes: C13 G01 G12 G13 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s43546-021-00197-9

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