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CDX and iTraxx and their relation to the systemically important financial institutions: Evidence from the 2008–2009 financial crisis

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  • Calice, Giovanni

Abstract

This paper empirically investigates the linkages between the CDS index market and the equity returns of a sample of systemically important financial institutions (SIFIs). Both the 5-year investment grade iTraxx Europe and the 5-year investment grade CDX North America indexes are adopted as a market consensus of the overall credit risk in the financial system. Through a multivariate VAR model using historical data, the investigation uncovers three key findings. First, the equity returns for all systematically important institutions are inversely associated to shocks in the CDS index market. Second, European institutions demonstrate a stronger connection with the iTraxx whilst the US institutions are more closely related to the CDX. Furthermore, volatility originating in the CDS index market is unambiguously transmitted to both the insurance and the banking sector. Third, US banks are most severely distressed by the volatility transmission mechanism whilst European insurers are least affected.

Suggested Citation

  • Calice, Giovanni, 2014. "CDX and iTraxx and their relation to the systemically important financial institutions: Evidence from the 2008–2009 financial crisis," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 32(C), pages 20-37.
    • Handle: RePEc:eee:intfin:v:32:y:2014:i:c:p:20-37
    DOI: 10.1016/j.intfin.2014.03.011
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    Cited by:

    1. Chamizo, Álvaro & Novales, Alfonso, 2020. "Looking through systemic credit risk: Determinants, stress testing and market value," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 64(C).

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    More about this item

    Keywords

    Credit default swap index; CDX; iTraxx; Systemically important financial institutions; Financial stability;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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