Dynamic model for hedging of the European stock sector with credit default swaps and EURO STOXX 50 volatility index futures

Abstract

In this paper, the time-varying correlations are estimated for the purpose of examining whether CDS can act as a hedge and safe haven for the European stock sectors. Similarly, the implications for portfolio design are also evaluated on daily and weekly data span bases, concerning the period ranging from December 2007 to September 2017. Overall, the empirical results appear to reveal that the safe haven roles associated with the CDS and the portfolio design prove to differ noticeably across the time horizons as well as from one model to another. Likewise, choosing CDS or VSTOXX futures as hedging instrument seem to depend heavily on data frequency and the models applied. The interest lying behind the conduction of such a study is twofold: on the one hand, it should serve as a guide to investors through enabling them to opt for the most effective strategies useful for hedging the stock sectors' relating risks and, on the other hand, to highlight the models’ specifications associated impacts.

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