Credit Spread Changes and Equity Volatility: Evidence from Daily Data

Hibbert, Ann Marie; Pavlova, Ivelina; Barber, Joel R.; Dandapani, Krishnan

doi:10.1111/j.1540-6288.2011.00304.x

Cited by 16 publications

(31 citation statements)

References 59 publications

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“…Hibbert, Pavlov and Dandapani (2011) examine the determinants of changes in the credit yield spread in the U.S. corporate bond market. Utilizing a daily sample of liquid investment grade and high yield bonds, the authors demonstrate that systemic bond and stock market factors, as well as idiosyncratic equity market factors, influence the daily changes in the bond yield spread.…”

Section: Literature Reviewmentioning

confidence: 99%

Relationships between Financial Sectors’ CDS Spreads and Other Gauges of Risk: Did the Great Recession Change Them?

Hammoudeh

Bhar

Liu

2013

The Financial Review

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The objectives are to discern how the three financial sectors' credit default swap (CDS) spreads interrelate to each other and with three other risks in terms of possible contagion, competition, interdependence and independence relations under the full sample and two subperiods: the 2007 Great Recession and the 2009 Recovery, and to assess the impact of QE1 on those risks in the second subperiod. The results indicate that the own and cross-effects among the CDSs and the other risk measures are significant and mixed, but all in all contagion is dominant. The system has become less stable and less adjusting to the equilibrium The authors are especially grateful to Editor Bonnie Van Ness and an anonymous reviewer for many helpful comments. They also thank Kyongwook Choi, Farooq Malik, and Michael McAleer for responding to their questions and providing valuable comments. C 2013, The Eastern Finance Association 151 152 S. Hammoudeh et al./The Financial Review 48 (2013) 151-178in the first subperiod. QE1 in the second period decreases risks but increases inflationary expectations.

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Section: Literature Reviewmentioning

confidence: 99%

Relationships between Financial Sectors’ CDS Spreads and Other Gauges of Risk: Did the Great Recession Change Them?

Hammoudeh

Bhar

Liu

2013

The Financial Review

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“…Other papers that analyze the determinants of CDS spreads in a similar fashion include Blanco et al (2005) and Ericsson et al (2009). However, most existing papers about the determinants of credit spreads have focused on bond markets, not on CDS markets (e.g., Collin-Dufresne et al 2001;Campbell and Taksler 2003;Cremers et al 2008;Hibbert et al 2011). We extend the available empirical evidence to a sample of Asia-Pacific CDS markets.…”

Section: A Methodologymentioning

confidence: 96%

The Co‐Movement of Credit Default Swap Spreads, Equity Returns and Volatility: Evidence from Asia‐Pacific Markets

Fonseca

Gottschalk

2018

Int Rev Finance

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We provide a comprehensive analysis of the co‐movement of credit default swap (CDS), equity, and volatility markets in four Asia‐Pacific countries at firm and index level during the period 2007–2010. First, we examine lead–lag relationships between CDS spread changes, equity returns, and changes in volatility using a vector autoregressive model. At the firm level equity returns lead changes in CDS spreads and realized volatility. However, at the index level the intertemporal linkages between the three markets are less clear‐cut. Second, we apply the measures proposed by Diebold and Yilmaz (2014) to an analysis of volatility spillovers among the CDS, equities, and volatility asset classes. The results suggest that realized volatility (at firm level) and implied volatility (at index level) are the main transmitters of cross‐market volatility spillovers. Third, we analyze the impact of various structural factors and confirm the importance of realized volatility of equity returns as a determinant of CDS spreads.

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“…Therefore also the implied volatility of each company's stock options with a time to maturity of three months is included, following Pires et al (2010) and Hibbert et al (2011), among others. In the structural framework, since the value of debt equals risk-free debt plus a short position in a credit put option with an exercise price equal to the face value of debt, credit spreads should rise with volatility, because the short put price decreases when volatility 21 It can be argued that for 5-year CDS contracts, the risk-free interest rate should instead be a long-term interest rate, e.g., the expected return on a default-free 5-year zero coupon bond.…”

Section: )-5) Asset Volatility (Stock Volatility )mentioning

confidence: 99%

Does Credit Risk Impact Liquidity Risk? Evidence from Credit Default Swap Markets

Hertrich

2014

SSRN Journal

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During the recent financial crisis that erupted in mid-2007, credit default swap spreads increased by several hundred basis points, accompanied by a liquidity shortage in the U.S. financial sector. This period has both evidenced the importance that liquidity has for investors and underlined the need to understand the linkages between credit markets and liquidity. This paper sheds light on the dynamic interactions between credit and liquidity risk in the credit default swap market. Contrary to the common belief that illiquidity leads to a credit risk deterioration in financial markets, it is found that in a sample of German and Swiss companies, credit risk is more likely to be weakly endogenous for liquidity risk than vice versa. The results suggest that a negative credit shock typically leads to a subsequent liquidity shortage in the credit default swap market, in the spirit of, for instance, the liquidity spiral posited by Brunnermaier (2009), and extends our knowledge about how credit markets work, as it helps to explain the amplification mechanisms that severely aggravated the recent crisis and also indicates which macro-prudential policies would be suitable for preventing a similar financial crisis in the future.

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Credit Spread Changes and Equity Volatility: Evidence from Daily Data

Cited by 16 publications

References 59 publications

Relationships between Financial Sectors’ CDS Spreads and Other Gauges of Risk: Did the Great Recession Change Them?

Relationships between Financial Sectors’ CDS Spreads and Other Gauges of Risk: Did the Great Recession Change Them?

The Co‐Movement of Credit Default Swap Spreads, Equity Returns and Volatility: Evidence from Asia‐Pacific Markets

Does Credit Risk Impact Liquidity Risk? Evidence from Credit Default Swap Markets

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