Volatility spillovers and connectedness among credit default swap sector indexes

Abstract

This article studies volatility spill-over effects and market connectedness using daily data of credit default swap spreads for U.S. companies over a period from 2007 to 2012. We quantify volatility spillovers by means of an unconditional analysis performed using the entire sample, and a conditional analysis which estimates the model using a rolling window. As our database contains the global financial crisis (GFC), we are able to determine how volatility spillovers spread in the economy during the recent market turmoil. Our unconditional results confirm that the Financials sector was a main contributor to the overall market volatility along with the Consumer Goods, Consumer Services and Basic Materials sectors. The conditional analysis clearly identifies that the Financials was the major feeding sector of volatility spill-over effects, and that the market volatility was successively driven by Technology and Basic Materials over a rather short period of time, followed by Consumer Goods and Consumer Services over a prolonged period of time. Our results illustrate indirect linkages between the sectors that conveyed shocks during the GFC.

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