Volatility Patterns of CDS, Bond and Stock Markets Before and During the Financial Crisis: Evidence from Major Financial Institutions

Ansgar Belke, Christian Gokus

Abstract


This study is motivated by the development of credit-related instruments and signals of stock price movements of large banks during the recent financial crisis. What is common to most of the empirical studies in this field is that they concentrate on modeling the conditional mean. Surprisingly, only very few studies dealing with credit default swaps account for the characteristics of the variances. Our aim is to address this issue and provide insights on the volatility patterns of CDS spreads, bond yield spreads and stock prices. A multivariate GARCH is applied to the data of four large US banks over the period ranging from January 01, 2006 to December 31, 2009. With the commonly known shortcomings of credit ratings, the demand for market-based indicators has risen as they can help to assess the creditworthiness of debtors more reliably. The obtained findings suggest that volatility takes a significant higher level in times of crisis. This is particularly evident with respect to the variances of stock returns and CDS spread changes. Furthermore, correlations and covariances are time-varying and also increased in absolute values after the outbreak of the crisis, indicating stronger dependency among the examined variables. Specific events which have a huge impact on the financial markets as a whole (e.g., the collapse of Lehman Brothers) are also visible in the (co)variances and correlations as strong movements in the respective series.


Full Text: PDF DOI: 10.5539/ijef.v6n7p53

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This work is licensed under a Creative Commons Attribution 3.0 License.

International Journal of Economics and Finance  ISSN  1916-971X (Print) ISSN  1916-9728 (Online)

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