Dynamic Volatility Spillovers and Structural Breaks across Asian Emerging CDS Markets

Abstract

This study examines the contagion effect across the six Asian credit debt swaps (CDS) markets using the multivariate DECO-GARCH model. In addition, we also identify potential structural breaks, which are associated with the 2007-2009 global financial crisis (GFC). This crisis might intensify the dynamic equicorrelations, increasing the linkages of CDS markets. Our empirical results show strong evidence of equicorrelation in the volatility and significant dynamic spillovers across emerging CDS markets. Moreover, we find several structural breaks in Asian emerging CDS markets using ICSS algorithm. These structural breaks are associated with GFC of 2007-2008. Finally, these volatility spillover trends are more pronounced in the aftermath of the recent financial crisis, namely the GFC of 2007-2008. This implies that structural breaks intensify the spillovers across Asian CDS markets and diminishes the portfolio benefits in these credit markets. Thus, our finding supports the contagion effect of CDS markets during the market turmoils.