Journal of the Korean Data Analysis Society

Korean Data Analysis Society (한국자료분석학회)
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Co-movements between VIX and Emerging CDSs: A Wavelet Coherence Analysis

  • Kang, Sang Hoon (Department of Business Administration, Pusan National University)
  • Received : 2018.10.18
  • Accepted : 2018.11.23
  • Published : 2018.12.31

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Abstract

The recent financial crises cause the co-movement and transmit the risk across different markets and assets. It is well known that market fear affects the quality of credit in the financial markets. In this context, this study examines the co-movement between the volatility index (VIX) of the Chicago Board Options Exchange (CBOE), or VIX, and six emerging countries' credit default swaps (CDSs), by implementing wavelet coherence. Our research aims at revealing whether the VIX can be used to hedge against the bubble behavior of the CDS market in different investment holding periods (short-run, medium-run, and long-run), as well as whether either market can be used to manage and hedge overall market downside risks. The wavelet coherence results show a high degree of co-movement between the VIX and CDS during the 2007-2009 global financial crisis, across the 16-64 weeks' frequency band. In addition, we observe that the positive correlation between the VIX and the CDS markets, implying that the market turmoil intensifies the co-movement between the VIX and CDS markets.

Keywords

Acknowledgement

Supported by : National Research Foundation of Korea

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