CDS Industrial Sector Indices, credit and liquidity risk

Monica Billio, Massimiliano Caporin, Loriana Pelizzon () and Domenico Sartore

No 2012_09, Working Papers from Department of Economics, University of Venice "Ca' Foscari"

Abstract: This paper studies the risk spillover among US Industrial Sectors and focuses on the connection between credit and liquidity risks. The proposed methodology is based on quantile regressions and considers the movements of CDS Industrial Sector Indices depending on common risk factors such as equity risk, risk appetite, term spread and TED spread. We use CDS Industrial indexes and the market risk factor to identify the impact of market liquidity risk and market credit risk in the different US Industries and give evidence of the heterogeneity of this relation. We show that all the sectors are largely exposed to the non investment grade bond spread indicating that credit risk is largely a common factor rather than a sector specific factor. With a lower impact, we also find that market risk and interest rate risk are also common factors, as well as liquidity risk. These results indicate that diversification among sectors might collapse when credit, equity and liquidity events hit the market. The information extracted from CDS market could thus provide relevant information for sector allocation strategies.

Keywords: Credit Risk; Common factors; liquidity risk (search for similar items in EconPapers)
JEL-codes: F34 G12 G15 (search for similar items in EconPapers)
Pages: 26
Date: 2012
New Economics Papers: this item is included in nep-ban and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.unive.it/web/fileadmin/user_upload/dip ... on_sartore_09_12.pdf First version, 2012 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ven:wpaper:2012_09

Access Statistics for this paper

More papers in Working Papers from Department of Economics, University of Venice "Ca' Foscari" Contact information at EDIRC.
Bibliographic data for series maintained by Sassano Sonia ().