What drives cross-border spillovers among sovereign CDS, foreign exchange and stock markets?

Abstract

In the wake of financial globalization, the volatility spillovers between financial markets have become increasingly prominent. Thus, this study focuses on three typical multi-country markets, i.e., the sovereign credit default swap (CDS), foreign exchange, and stock markets. Based on the Diebold–Yilmaz spillover index and complex network technique, this study not only compares the degree and structural characteristics of cross-border spillovers in these markets but also analyzes the cross-market spillovers in pairs. Secondary regressions are also conducted to understand the drivers of cross-border spillovers among these markets. Based on the findings, the stock market has the most prominent cross-border spillover effect, with net spillover effects on the sovereign CDS and foreign exchange markets. Moreover, market sentiment drives the majority of the cross-border spillovers within the stock and sovereign CDS markets, while cross-border spillovers in the foreign exchange market are mainly driven by economic fundamentals and monetary policies.