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The Journal of Alternative Investments

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Primary Article

Are the U.S. Stock Market and Credit Default Swap Market Related?

Evidence from the CDX Indices

Hung-Gay Fung, Gregory E. Sierra, Jot Yau and Gaiyan Zhang
The Journal of Alternative Investments Summer 2008, 11 (1) 43-61; DOI: https://doi.org/10.3905/jai.2008.708849
Hung-Gay Fung
Dr. Y.S. Tsiang Chair professor of Chinese Studies at the College of Business Administration and the Center of International Studies at the University of Missouri in St. Louis, MO.
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  • For correspondence: fungh@msx.umsl.edu
Gregory E. Sierra
With the Federal Reserve Bank of Richmond in Charlotte, NC.
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Jot Yau
Robert D. O'Brien Chair in Business Administration and professor of finance at the Albers School of Business and Economics, Seattle University in Seattle, WA.
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  • For correspondence: jyau@seattleu.edu
Gaiyan Zhang
An assistant professor of finance at the College of Business Administration, University of Missouri in St. Louis, MO.
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  • For correspondence: zhangga@umsl.edu
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Abstract

This article examines the market-wide relations between the U.S. stock market and the credit default swap (CDS) market for the period 2001–2007. Results indicate that the lead-lag relationship between the U.S. stock market and the CDS market depends on the credit quality of the underlying reference entity. Specifically, this article finds significant mutual feedback of information between the stock market and the high-yield CDS market in terms of pricing and volatility, while the stock market leads the investment-grade CDS index in the pricing process. The CDS market seems to play a more significant role in volatility spillover than the stock market. That is, volatilities of both the investment-grade and high-yield CDS indices seem to lead the stock market volatility, while the latter has a feedback effect to that of the high-yield CDS market only. Overall, the implication is that market participants should seek information in both markets when they are about to engage in trading and/or hedging

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The Journal of Alternative Investments
Vol. 11, Issue 1
Summer 2008
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Are the U.S. Stock Market and Credit Default Swap Market Related?
Hung-Gay Fung, Gregory E. Sierra, Jot Yau, Gaiyan Zhang
The Journal of Alternative Investments Jun 2008, 11 (1) 43-61; DOI: 10.3905/jai.2008.708849

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Are the U.S. Stock Market and Credit Default Swap Market Related?
Hung-Gay Fung, Gregory E. Sierra, Jot Yau, Gaiyan Zhang
The Journal of Alternative Investments Jun 2008, 11 (1) 43-61; DOI: 10.3905/jai.2008.708849
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