From fears to recession? Time‐frequency risk contagion among stock and credit default swap markets during the COVID pandemic

ABSTRACT

This study uses a high-dimensional time-frequency volatility spillover model to examine risk interactions across 32 global stock and credit default swap (CDS) markets during the coronavirus (COVID-19) pandemic. Our empirical results mainly show that cross-market risk spillovers between these two types of markets are rare over the whole crisis period. Adding CDS assets to the stock portfolio would significantly decrease the overall risk spillovers in the mixed portfolio. Then, the time-frequency spillover and rolling window analyses confirm this finding and provide further evidence of frequency heterogeneity of risk spillovers during the pandemic. The outbreak of the COVID pandemic only sharply increases short-term risk spillovers between the stock and sovereign CDS market but exerts insignificant impacts on the medium and long-term cross-market risk spillovers. Moreover, our results show that developed countries are net transmitters in the stock markets. In contrast, the emerging markets account for the most risk spillovers in sovereign CDS markets over the sample period, emphasizing the heterogenous adverse impacts of the pandemic across various countries and markets. Finally, we find that bailouts implemented by the US and EU central banks, though with heterogeneous impacts across frequencies, gradually enhance the confidence and resilience of investors in these markets.