Can CDS indexes signal future turmoils in the stock market? A Markov switching perspective

Single-name Credit Default Swaps (CDS) are considered the main providers of direct information related with a reference entity’s creditworthiness and, for this reason, they have often been the core of news on the current financial crisis. The academic research has focused mainly on the capacity of C...

Full description

Saved in:
Bibliographic Details
Published in:Central European journal of operations research 2014-06, Vol.22 (2), p.285-305
Main Authors: Castellano, Rosella, Scaccia, Luisa
Format: Article
Language:English
Subjects:
Bonding
Business and Management
Cadmium sulfides
Credit default swaps
Credit ratings
Credit risk
Default
Derivatives
Economic crisis
Economic models
Economic statistics
Economic theory
Finance
Investments
Investors
Markets
Markov processes
News
Operations research
Operations Research/Decision Theory
Original Paper
Prices
Rating services
Ratings & rankings
Raw materials
Securities analysis
Securities markets
Stochastic models
Stock exchanges
Stock market indexes
Stock markets
Studies
Switches
Switching
Volatility
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:Single-name Credit Default Swaps (CDS) are considered the main providers of direct information related with a reference entity’s creditworthiness and, for this reason, they have often been the core of news on the current financial crisis. The academic research has focused mainly on the capacity of CDS in anticipating agencies’ official rating changes and—in this respect—on their superior signalling power, compared to bond and stock markets. The aim of this work is, instead, to investigate the ability of fluctuations in CDS indexes in anticipating the occurrence of stock market crises. Our goal is to show that CDS indexes may provide investors and institutions with early warning signals of financial distresses in the stock market. We make use of a Markov switching model with states characterized by increasing levels of volatility and compare the times in which the first switch in a high volatility state occurs, respectively, in CDS and stock market index quotes. The data set consists of daily closing quotes for 5 years CDS and stock market index prices, covering the time period from 2004 to 2010. In order to capture possible geographic differences in CDS index capacity of foreseeing stock market distresses, data referring to two different regions, Europe and United States, are analyzed.
ISSN:1435-246X
1613-9178
DOI:10.1007/s10100-013-0330-7