Impact of TED spread, bond spread, and implied volatility on stock market returns, oil prices, home prices and exchange rates

Abstract

From mid-2007, global financial system faced what has come to be termed as the 'worst' financial crisis since the Great Depression. During the same time, financial asset valuation witnessed unusually high activity in their returns and volatility as did investor sentiment-based counterparty risk indices. By use of VAR and GARCH methodology, this paper investigates dynamic linkages among well-known proxies of investor sentiment-based counterparty risk measures - TED spread, bond spread, and the volatility index (USVIX) - and stock market returns, oil prices, exchange rates, and home prices. The empirical results indicate a significant impact of TED spread on stock market returns, oil prices and home prices. VIX and bond spread were observed to have a significant impact on exchange rates and oil prices. We also observed evidence of volatility spillover from TED spread to stock market returns, oil prices, and exchange rates, and from USVIX to stock market returns and oil prices.