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Equities, credits and volatilities: A multivariate analysis of the European market during the subprime crisis

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  • Schreiber, Irene
  • Müller, Gernot
  • Klüppelberg, Claudia
  • Wagner, Niklas

Abstract

We study the lead–lag dependence between aggregate credit spreads and equity prices as well as implied equity volatility, which is important for proper credit risk assessment. Our analysis includes daily quotes of the iTraxx Europe index, the Dow Jones Euro Stoxx 50 index, and the Dow Jones VStoxx index during the period of June 2004 to April 2009, i.e. before and during the subprime financial crisis. We robustly estimate a vector autoregressive (VAR) model, allow for time-varying coefficients and assume a multivariate autoregressive conditional heteroskedastic (ARCH) model of the BEKK-type for the innovations. We find that while the commonly predicted negative relation between asset prices and credit spreads holds during the pre-crisis period, it fails to hold during the subsequent crisis period. Equity returns turn out to be insignificant predictors of spreads during the crisis and spread changes significantly and positively lead changes in equity market volatility. Hence, while information in aggregate spreads is typically not driving aggregate market risk, it well may do so during a period in which severe stress in credit markets spills over to the equity market. In sum our results cast some doubt on the stability of the predictions of structural models of credit risk during periods of market stress.

Suggested Citation

  • Schreiber, Irene & Müller, Gernot & Klüppelberg, Claudia & Wagner, Niklas, 2012. "Equities, credits and volatilities: A multivariate analysis of the European market during the subprime crisis," International Review of Financial Analysis, Elsevier, vol. 24(C), pages 57-65.
    • Handle: RePEc:eee:finana:v:24:y:2012:i:c:p:57-65
    DOI: 10.1016/j.irfa.2012.07.006
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    Cited by:

    1. Miroslav Mateev, 2019. "Volatility relation between credit default swap and stock market: new empirical tests," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 43(4), pages 681-712, October.
    2. Benjamin Hippert & André Uhde & Sascha Tobias Wengerek, 2019. "Portfolio benefits of adding corporate credit default swap indices: evidence from North America and Europe," Review of Derivatives Research, Springer, vol. 22(2), pages 203-259, July.
    3. Yufeng Chen & Wenqi Li & Xi Jin, 2018. "Volatility Spillovers between Crude Oil Prices and New Energy Stock Price in China," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 43-62, December.
    4. repec:zbw:rwirep:0243 is not listed on IDEAS
    5. Wasim Ahmad & N.R. Bhanumurthy & Sanjay Sehgal, 2014. "The Eurozone crisis and its contagion effects on the European stock markets," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 31(3), pages 325-352, July.
    6. Riedel, Christoph & Thuraisamy, Kannan S. & Wagner, Niklas, 2013. "Credit cycle dependent spread determinants in emerging sovereign debt markets," Emerging Markets Review, Elsevier, vol. 17(C), pages 209-223.
    7. Xun Huang & Fanyong Guo, 2021. "A kernel fuzzy twin SVM model for early warning systems of extreme financial risks," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(1), pages 1459-1468, January.
    8. Wang, Ze & Gao, Xiangyun & An, Haizhong & Tang, Renwu & Sun, Qingru, 2020. "Identifying influential energy stocks based on spillover network," International Review of Financial Analysis, Elsevier, vol. 68(C).
    9. Ansgar Belke & Christian Gokus, 2011. "Volatility Patterns of CDS, Bond and Stock Markets before and during the Financial Crisis: Evidence from Major Financial Institutions," Discussion Papers of DIW Berlin 1107, DIW Berlin, German Institute for Economic Research.
    10. Theplib, Krit & Sethapramote, Yuthana & Jiranyakul, Komain, 2020. "Shock and Volatility Spillovers between Crude Oil Price and Stock Returns: Evidence for Thailand," MPRA Paper 98094, University Library of Munich, Germany.
    11. Ansgar Belke & Christian Gokus, 2011. "Volatility Patterns of CDS, Bond and Stock Markets Before and During the Financial Crisis – Evidence from Major Financial Institutions," Ruhr Economic Papers 0243, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    12. Yu, Lean & Zha, Rui & Stafylas, Dimitrios & He, Kaijian & Liu, Jia, 2020. "Dependences and volatility spillovers between the oil and stock markets: New evidence from the copula and VAR-BEKK-GARCH models," International Review of Financial Analysis, Elsevier, vol. 68(C).

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    More about this item

    Keywords

    Credit risk; Credit default swaps; iTraxx index; Vector autoregression; Multivariate GARCH; BEKK;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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