A joint analysis of market indexes in credit default swap, volatility and stock markets. Issue 19 (20th April 2016)

• Record Type: Journal Article
• Authors: Da Fonseca, José; Wang, Peiming
• Is Part Of: Applied economics. Volume 48:Issue 19(2016)
• Page Start: 1767
• Page End: 1784
• Publication Date: 2016-04-20
• Subjects: Credit default swap -- volatility -- market linkages -- Markov switching; C10 -- G12 -- G13; Economics -- Periodicals; 330
• DOI: 10.1080/00036846.2015.1109036
• Languages: English
• ISSNs: 0003-6846

Abstract

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.