An analysis of sectoral equity and CDS spreads

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Abstract

In this paper, we find that CDS return shocks are important in explaining the forecast error variance of sectoral equity returns for the USA. The CDS return shocks have different effects on equity returns and return volatility in the pre-crisis and crisis periods. It is the post-Lehman crisis period in which the effects of CDS return shocks are the most dominant. Finally, we construct a spillover index and find that it is time-varying and explains a larger share of total forecast error variance of sectoral equity and CDS returns for some sectors than for others.

Original languageEnglish
Pages (from-to)80-93
Number of pages14
JournalJournal of International Financial Markets, Institutions and Money
Volume34
DOIs
Publication statusPublished - Jan 2015
Externally publishedYes

Keywords

  • CDS spread
  • Equity returns
  • Forecast error variance
  • Spillover

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