Abstract

This study analyses volatility connectedness at sectoral and regional level within and across the US, UK, EU and Japanese regions between the CDS and equity markets. Analysis is made on 32 sectors and 70 sub-sectors within the regions under study with each having 2,479 observations, covering the period between 2008 until June 2017. The sample is divided between crisis and after-crisis period and the novel connectedness index by Diebold-Yilmaz (2014) is proposed. The domestic and regional analysis show that connectedness between the two asset classes is in general higher during the crisis period. Although the static Gaussian results for the regional analysis show low levels of connectedness across the board, the dynamic analysis show significant connectedness levels, with levels being predominantly higher during the crisis period, signifying contagion effects also at regional level between the two asset classes. When considering the dynamic volatility connectedness between the two asset classes, equity is the asset class which transmits volatility the most. In the US and EU connectedness between the two asset classes in most sectors is predominantly large during disturbed periods, particularly the 2009 crisis and the EU sovereign crisis.

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