CDS and stock market: panel evidence under Cross-Section dependency

Authors

  • Sinan Esen
  • Feyyaz Zeren
  • Halil Şimdi

Keywords:

CDS Spread, Stock Market, Panel Cointegration, Panel Causality, Cross-Section Dependency, C33, G15

Abstract

In recent years, the spreads of CDS that are crucial aspects in detecting the financial risk level of countries have been taken more notice of by investors. In this paper, we investigate the relation between CDS spreads and countries’ stock indices by using Basher and Westerlund (2009) panel cointegration and DumitrescuHurlin (2012) panel causality tests. Causality from stock market to CDS figures has been detected by the Sequential Panel Selection Method (SPSM) of Chortareas and Kapetanios (2009) for 7 out of 13 G20 countries. Additionally, the study finds a negative correlation between variables with the usage of Common Correlated Effects (CCE) estimator. The positive increasing trend in stock markets causes a decrease in the financial risks that naturally allow low CDS spreads.

Downloads

Issue

Section

Articles