Volatility Transmission Among the CDS, Equity, and Bond Markets

Abstract

This article investigates volatility transmission among the credit default swap (CDS), equity, and bond markets, using a multivariate GARCH model. The authors hypothesise that volatility in the bond and equity markets can originate from the CDS market where there is potential insider trading and increased trading activity due to private credit information. However, the authors find little evidence to support this. There is evidence for an alternative view that as investors search for yield across different asset classes the links among the CDS, bond, and equity markets strengthen. Volatility in any of the three markets is commonly transmitted to the other two markets.

TOPICS: Credit default swaps, volatility measures, statistical methods, fixed-income portfolio management