Dynamics of CDS spread indexes of US financial sectors

Shawkat Hammoudeh, Mohan Singh Nandha, Yuan Yuan

    Research output: Contribution to journalArticleResearchpeer-review

    14 Citations (Scopus)

    Abstract

    This article examines the Credit Default Swap (CDS) spread index for three sectors, banking, financial services and insurance, in the short and long run. In the long run, the results show that the index of the insurance sector which sells the long term CDS contracts has the highest adjustment, while the banking sector is not error correcting. In the short run, although the insurance sector CDS spread index has general predictive power of all sector CDS spreads, the evidence suggests that the banking sector particularly leads the financial services and this in turn leads the insurance sector, implying a leading sector CDS pricing role for the banking spreads in the short run. The short run sensitivity Generalized Impulse Response Function (GIRF) and Generalized Variance Decomposition (GVDC) analyses also demonstrate that the sectors credit risk responds more to credit events in the banking sector than in the other two sectors other than their own over a 50 day horizon. However, the lowest cross sector CDS shock impacts in the short run come from the insurance sector. These results are useful for regulators wishing to embark on new regulations of these financial institutions such as Basel III.
    Original languageEnglish
    Pages (from-to)213 - 223
    Number of pages11
    JournalApplied Economics
    Volume45
    Issue number2
    DOIs
    Publication statusPublished - 2013

    Cite this

    Hammoudeh, Shawkat ; Nandha, Mohan Singh ; Yuan, Yuan. / Dynamics of CDS spread indexes of US financial sectors. In: Applied Economics. 2013 ; Vol. 45, No. 2. pp. 213 - 223.
    @article{08cb296ae6764a1e93847729d722d360,
    title = "Dynamics of CDS spread indexes of US financial sectors",
    abstract = "This article examines the Credit Default Swap (CDS) spread index for three sectors, banking, financial services and insurance, in the short and long run. In the long run, the results show that the index of the insurance sector which sells the long term CDS contracts has the highest adjustment, while the banking sector is not error correcting. In the short run, although the insurance sector CDS spread index has general predictive power of all sector CDS spreads, the evidence suggests that the banking sector particularly leads the financial services and this in turn leads the insurance sector, implying a leading sector CDS pricing role for the banking spreads in the short run. The short run sensitivity Generalized Impulse Response Function (GIRF) and Generalized Variance Decomposition (GVDC) analyses also demonstrate that the sectors credit risk responds more to credit events in the banking sector than in the other two sectors other than their own over a 50 day horizon. However, the lowest cross sector CDS shock impacts in the short run come from the insurance sector. These results are useful for regulators wishing to embark on new regulations of these financial institutions such as Basel III.",
    author = "Shawkat Hammoudeh and Nandha, {Mohan Singh} and Yuan Yuan",
    year = "2013",
    doi = "10.1080/00036846.2011.597727",
    language = "English",
    volume = "45",
    pages = "213 -- 223",
    journal = "Applied Economics",
    issn = "0003-6846",
    publisher = "Taylor & Francis",
    number = "2",

    }

    Hammoudeh, S, Nandha, MS & Yuan, Y 2013, 'Dynamics of CDS spread indexes of US financial sectors', Applied Economics, vol. 45, no. 2, pp. 213 - 223. https://doi.org/10.1080/00036846.2011.597727

    Dynamics of CDS spread indexes of US financial sectors. / Hammoudeh, Shawkat; Nandha, Mohan Singh; Yuan, Yuan.

    In: Applied Economics, Vol. 45, No. 2, 2013, p. 213 - 223.

    Research output: Contribution to journalArticleResearchpeer-review

    TY - JOUR

    T1 - Dynamics of CDS spread indexes of US financial sectors

    AU - Hammoudeh, Shawkat

    AU - Nandha, Mohan Singh

    AU - Yuan, Yuan

    PY - 2013

    Y1 - 2013

    N2 - This article examines the Credit Default Swap (CDS) spread index for three sectors, banking, financial services and insurance, in the short and long run. In the long run, the results show that the index of the insurance sector which sells the long term CDS contracts has the highest adjustment, while the banking sector is not error correcting. In the short run, although the insurance sector CDS spread index has general predictive power of all sector CDS spreads, the evidence suggests that the banking sector particularly leads the financial services and this in turn leads the insurance sector, implying a leading sector CDS pricing role for the banking spreads in the short run. The short run sensitivity Generalized Impulse Response Function (GIRF) and Generalized Variance Decomposition (GVDC) analyses also demonstrate that the sectors credit risk responds more to credit events in the banking sector than in the other two sectors other than their own over a 50 day horizon. However, the lowest cross sector CDS shock impacts in the short run come from the insurance sector. These results are useful for regulators wishing to embark on new regulations of these financial institutions such as Basel III.

    AB - This article examines the Credit Default Swap (CDS) spread index for three sectors, banking, financial services and insurance, in the short and long run. In the long run, the results show that the index of the insurance sector which sells the long term CDS contracts has the highest adjustment, while the banking sector is not error correcting. In the short run, although the insurance sector CDS spread index has general predictive power of all sector CDS spreads, the evidence suggests that the banking sector particularly leads the financial services and this in turn leads the insurance sector, implying a leading sector CDS pricing role for the banking spreads in the short run. The short run sensitivity Generalized Impulse Response Function (GIRF) and Generalized Variance Decomposition (GVDC) analyses also demonstrate that the sectors credit risk responds more to credit events in the banking sector than in the other two sectors other than their own over a 50 day horizon. However, the lowest cross sector CDS shock impacts in the short run come from the insurance sector. These results are useful for regulators wishing to embark on new regulations of these financial institutions such as Basel III.

    U2 - 10.1080/00036846.2011.597727

    DO - 10.1080/00036846.2011.597727

    M3 - Article

    VL - 45

    SP - 213

    EP - 223

    JO - Applied Economics

    JF - Applied Economics

    SN - 0003-6846

    IS - 2

    ER -