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Empirical Analysis Based on the Lead-lag Relationship between European Credit Default Swap Market and Stock Market

Author: JiJingJing
Tutor: ZhangShunMing
School: Xiamen University
Course: Financial Engineering
Keywords: Credit default swap market Stock market Lead-lag relationship
CLC: F831.5
Type: Master's thesis
Year: 2009
Downloads: 182
Quote: 0
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Abstract


Began in the U.S. subprime mortgage crisis erupted since 2007, and now continues to spread. This credit risk is ignited by the global financial crisis, so that people realize once again the importance of credit risk. CDS (Credit Default Swap) is a credit derivative product which is used to transfer the risk of default is an important financial tool, its price and the reference entity in the next period of time closely linked to the probability of occurrence of a credit event. Moreover, credit default swap market in the last five years, has been an unprecedented rapid development, the rapid growth of a mature market. In such a market has a large number of traders, the transaction is the content of an event of default of the reference entity relevant information, so on the credit risk of the reference entity's information should be reflected in a timely manner. This paper studies the credit default swap market and the correlation between the stock market and the lead-lag relationship between the two markets in order to seek information conduction mode. In research methods, this paper in order to avoid non-systematic noise, can represent the entire market with a level of credit default swap index and the stock market index as a measure of two variables, and to reflect the different levels of the company's creditworthiness may affect signal transduction model, the credit default swap index is divided into investment grade and speculative grade, as well as their corresponding equity portfolio constructed to study the lead-lag relationship between the two markets. Drawing on the work of previous studies based on the VAR model and supplemented through the use of other measurement methods, the paper on the European market on September 20, 2007 to April 7, 2008 between the daily data for research, the following conclusions : whether the investment-grade credit default swaps index, or speculative-grade credit default swaps index, which with stock index negative correlation between, and are within the scope of market-leading stock index. Speculative-grade credit default swap market index on the stock market can have a greater impact. For investment-grade companies, their stock market leading credit default swap market; For speculative-grade companies, the credit default swap market leading stock market. These conclusions have been through robustness test to prove their stability and reliability. In this paper, after the conduct of the construction of the credit derivatives market has a certain reference value.

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CLC: > Economic > Fiscal, monetary > Finance, banking > World of finance, banking > Financial market
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