SLPR2016IREF.pdf (817.77 kB)
Global risk spillover and the predictability of sovereign CDS spread: International evidence
journal contributionposted on 2022-05-12, 04:14 authored by S Srivastava, Hai LinHai Lin, IM Premachandra, H Roberts
Using an error correction model, we document strong evidence of Granger causality in mean from the S&P option market to the sovereign CDS market in 98% of the 56 sovereigns we investigate. Tests under conditional heteroskedasticity provide further evidence of the risk spillover effect from the S&P index option market to the CDS market in mean, variance, and value-at-risk. The strong spillover effect during the recent financial crisis implies that global shocks first affect the S&P option market and then spill over to the sovereign CDS market. We demonstrate that our results are quite robust.