A joint analysis of market indexes in credit default swap, volatility and stock markets

José Da Fonseca and Peiming Wang

Applied Economics, 2016, vol. 48, issue 19, 1767-1784

Abstract: This paper analyses the joint dynamics of the CDS, volatility and stock markets using both VAR and Markov regime-switching VAR models with market index data. It shows that the joint behaviour of the three markets is better characterized by the Markov model with two regimes corresponding to low- and high-volatile market conditions. The relationship between changes in the market indexes under a regime is consistent with theory and persistent; the information transmission process of shocks to the markets is similar for the two regimes with a more important role for CDS shock; and the volatility in the money market is an important determinant of regime-switching. The findings have practical implications, particularly for hedging strategies with market indexes under different market conditions.

Date: 2016
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DOI: 10.1080/00036846.2015.1109036

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