Conclusions
The CDS-stock market nexus has attracted a great deal of attention following the GFC and ESDC as this connection between these markets reflects almost all financial and economic activities. Note that the notional value of the global CDS market grew from $6 trillion in 2004 to $24 trillion in 2013--and peaked at a level of $58 trillion just prior to the financial crisis (Bank for International Settlements).8 Nonetheless, the CDS spreads of the major US and European banks evidently increased after July 2007 when the S&P issued a credit watch alert for mortgage-backed securities (Ballester et al., 2016; Yu, 2017). The collapse of the Lehman Brothers on September 15, 2008, has also drawn the attention of all global financial markets, and the sovereign credit risk in particular has become a serious concern for many countries. This paper examines the extreme the connection between the U.S. CDS and stock sectoral markets over the daily period 2007–2014. For a deeper analysis, we focus on the connection at the sectoral level in order to provide useful information for portfolio managers and policy makers, using the quantile distributions to serve the interests of all market participants including speculators (money managers, hedge funds, market makers, etc.) and long term investors (institutional investors such as pension funds, banks, etc.) who may be disposed to work under different markets conditions.
