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CDX and iTraxx and their relation to the systemically important financial institutions: Evidence from the 2008-2009 financial crisis

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journal contribution
posted on 24.02.2017, 09:27 by Giovanni Calice
This paper empirically investigates the linkages between the CDS index market and the equity returns of a sample of systemically important financial institutions (SIFIs). Both the 5- year investment grade iTraxx Europe and the 5-year investment grade CDX North America indexes are adopted as a market consensus of the overall credit risk in the financial system. Through a multivariate VAR model using historical data, the investigation uncovers three key findings. First, the equity returns for all systematically important institutions are inversely associated to shocks in the CDS index market. Second, European institutions demonstrate a stronger connection with the iTraxx whilst the US institutions are more closely related to the CDX. Furthermore, volatility originating in the CDS index market is unambiguously transmitted to both the insurance and the banking sector. Third, US banks are most severely distressed by the volatility transmission mechanism whilst European insurers are least affected.

History

School

  • Business and Economics

Department

  • Business

Published in

Journal of International Financial Markets, Institutions and Money

Volume

32

Issue

1

Pages

20 - 37

Citation

CALICE, G., 2014. CDX and iTraxx and their relation to the systemically important financial institutions: evidence from the 2008-2009 financial crisis. Journal of International Financial Markets, Institutions and Money, 32 (1), pp.20-37

Version

AM (Accepted Manuscript)

Publisher statement

This work is made available according to the conditions of the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International (CC BY-NC-ND 4.0) licence. Full details of this licence are available at: https://creativecommons.org/licenses/by-nc-nd/4.0/

Publication date

2014

ISSN

1042-4431

Language

en

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