TY - JOUR

T1 - CDX and iTraxx and their relation to the systemically important financial institutions: Evidence from the 2008-2009 financial crisis

AU - Calice, G

PY - 2014/9

Y1 - 2014/9

N2 - 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. (C) 2014 Elsevier B.V. All rights reserved.

AB - 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. (C) 2014 Elsevier B.V. All rights reserved.

U2 - 10.1016/j.intfin.2014.03.011

DO - 10.1016/j.intfin.2014.03.011

M3 - Article

VL - 32

SP - 20

EP - 37

JO - Journal of International Financial Markets, Institutions and Money

JF - Journal of International Financial Markets, Institutions and Money

SN - 1042-4431

ER -