Dynamic Return and Volatility Spillovers in Five Asian CDS Markets

This paper examines the dynamics of return and volatility spillover effects across five Asian sovereign credit default swaps (CDS), namely China, Indonesia, Korea, Malaysia, and Thailand, by employing the spillover index model of Diebold, Yilmaz (2012). In particular, we investigate the time-varying dynamics of return and volatility spillover indices that reveal the intensity and direction of transmission during the recent financial crises, i.e. the global financial crisis (GFC) of 2007-2009 and the European sovereign debt crisis (ESDC) of 2009-2012. Our empirical results are summarized as follows. First, we find that the Korean sovereign CDS is a source of spillovers to other sovereign CDS, while the Chinese sovereign CDS is a use of spillovers to other CDS during periods of recent turmoil. Second, the total return and volatility spillover indexes sharply burst in the 2007 subprime mortgage crisis and September 2008 of Lehman Brothers bankruptcy. These trends continuously persistent in subsequent crises, e.g., the 2009-2012 phases of the ESDC. Overall, our findings provide an important guideline for policy makers to minimize their sovereign credit risks, stabilize their financial markets and guard against the turmoil periods.