Spillovers among CDS indexes in the US financial sector |
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Institution: | 1. University of Bristol, United Kingdom;2. University of Western Australia, Australia;3. University of York, United Kingdom;4. Pennsylvania State University, United States;1. Faculty of Agribusiness and Commerce Department of Financial and Business System, Lincoln University, Lincoln, Christchurch 7647, New Zealand;2. Department of Economics and Finance College of Business and Law, University of Canterbury, Christchurch, New Zealand;3. School of Economics and Finance Massey University – Albany Campus, Auckland, New Zealand |
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Abstract: | By employing the robust cross-correlation function approach proposed by Hong (2001), and conducting pre-tests for structural breaks in the variances as well as removing the causality-in-mean effects in the causality-in-variance tests, we investigate volatility and mean transmissions between the credit default swaps (CDS) indexes of three US financial sectors. We use daily series on five-year banking, insurance, and financial services sector CDS indexes at the sector level from January 2004 to December 2011. We find evidence of significant causality-in-mean effects running from the banking sector to the insurance and financial services sector CDS indexes and from the financial services to the insurance sector CDS indexes, suggesting the leading role of the banking and financial services sectors in terms of price discovery. Moreover, we find significant causality-in-variance effects from the financial services sector CDS index to that of the banking sector, implying the existence of information transmission and contagion from the former, the least regulated of the three. The implications of these findings on traders and policymakers are also provided. |
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Keywords: | Financial sector CDS Global financial crisis Cross-correlation function Causality-in-variance Structural break |
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