On the risk spillover across the oil market, stock market, and the oil related CDS sectors: A volatility impulse response approach

Abstract

Compared to Credit Default Swap (CDS) literature, this study focuses on the magnitude of volatility transmission and the risk spillover mechanism across the oil market, financial market risks, and the oil-related CDS sectors. Our dataset includes futures prices of West Texas Intermediate (WTI) and seven different measures of markets and credit risks. Four of the vast risk measures are the oil-related CDSs for auto, chemicals, natural gas, and utility sectors. In addition, three measures of the financial market risk, the one-month expected equity volatility measured by VIX, MOVE and SMOVE are included. The daily dataset covers the period from 6 January 2004 to 2 February 2016. The volatility transmission mechanism across the oil and financial markets and CDS sectors is examined using the volatility impulse response model. We evaluate the risk transmission due to several recent crisis shocks around the world and the results show complicated transmission mechanisms that spread over long periods. Among these events, the Lehman Brothers bankruptcy has destabilizing effects on all oil-related sectors. Findings also show that all oil market related shocks have significant risk transmission effects. (C) 2018 Elsevier B.V. All rights reserved.