Financial CDS, stock market and interest rates: Which drives which?


Hammoudeh S., SARI R.

NORTH AMERICAN JOURNAL OF ECONOMICS AND FINANCE, vol.22, no.3, pp.257-276, 2011 (Journal Indexed in SSCI) identifier identifier

  • Publication Type: Article / Article
  • Volume: 22 Issue: 3
  • Publication Date: 2011
  • Doi Number: 10.1016/j.najef.2011.04.001
  • Title of Journal : NORTH AMERICAN JOURNAL OF ECONOMICS AND FINANCE
  • Page Numbers: pp.257-276

Abstract

The objective is to examine the short- and long-run dynamics of US financial CDS index spreads at the sector level and explore their relationships with the stock market and the short- and long-run government securities, paying particular attention to the subperiod that begins with the 2007 Great Recession. We use daily time series for the three US five-year CDS index spreads for banking, financial services and insurance sectors, the S&P 500 index, the short- and long-term Treasury securities rates. Employing the Autoregressive Distributed Lag approach (ARDL), this study finds more long-run relationships between the five financial variables in Model II that includes the six-month T bill rate than Model I that includes the 10-year T bond rate. The long-run relationships have weakened in both models under the subperiod than the full period. Moreover, the short-run dynamics have changed under the subperiod but the changes are mixed. Implications are relevant for decision-makers who are interested in financial relationships at the sector level than at the firm level. (C) 2011 Elsevier Inc. All rights reserved.