Journal article
Industry-level determinants of the linkage between credit and stock markets
Applied economics, v 50(49), pp 5277-5301
21 Oct 2018
Featured in Collection : UN Sustainable Development Goals @ Drexel
Abstract
This paper examines the relationship between US credit default swaps (CDS) and stock returns on an industry-wide basis across a number of investment horizons, with particular focus on the major determinants of such a relationship. Wavelet analysis is first applied to extract the CDS-stock wavelet correlation for each US industry. Then, Bayesian Model Averaging is employed to identify the key driving factors of the industry CDS-stock wavelet correlations at short- and long-term horizons. The empirical results indicate that the wavelet correlations between the industry CDS and stock returns are primarily negative over time and across time scales. Moreover, the CDS-stock correlation at longer horizons exhibits a much more stable pattern than its counterpart at shorter time frames. The results also demonstrate that the volatility of US Treasury and stock markets, as measured by the MOVE and VIX indices, respectively, the volatility of volatility, as captured by the VVIX index, and US economic policy uncertainty, as measured by the EPU index, are the most robust determinants of the correlation between CDS and stock returns at shorter and longer horizons for most US industries. In contrast, the Fama-French systematic equity factors exhibit a practically negligible explanatory power on the CDS-stock link.
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Details
- Title
- Industry-level determinants of the linkage between credit and stock markets
- Creators
- Syed Jawad Hussain Shahzad - Montpellier Business SchoolRomán Ferrer - University of ValenciaShawkat Hammoudeh - Montpellier Business SchoolRania Jammazi - Manouba University
- Publication Details
- Applied economics, v 50(49), pp 5277-5301
- Publisher
- Routledge
- Resource Type
- Journal article
- Language
- English
- Academic Unit
- Economics (School of Economics)
- Web of Science ID
- WOS:000443839600004
- Scopus ID
- 2-s2.0-85048898169
- Other Identifier
- 991019167846004721
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- Collaboration types
- Domestic collaboration
- International collaboration
- Web of Science research areas
- Economics