Price Discovery between Credit Default Swap and Foreign Exchange Markets: Unidirectional or Bidirectional Granger Causality?
Mills, Luke Aaron
This thesis investigates Granger causality in mean, variance and downside risk between the corporate credit default swap (CDS) and foreign exchange markets. Using an error correction model, a vector autoregressive model, Hong’s (2001) and Hong, Liu and Wang’s (2009) tests, I document strong evidence of bidirectional Granger causality in mean and variance between the three CDS indices and 45 countries in the sample. The significance of the results is found to depend on the credit quality of the underlying CDS indices’ entities, with investment-grade CDS entities showing more significant Granger causality results than noninvestment- grade CDS entities. These results are found to be most significant post-global financial crisis. Furthermore, the significance of the Granger causality in mean results is found to rely on the choice of econometric model; Hong’s (2001) test is found to be the most significant, followed by an error correction model, and last a vector autoregressive model.
Advisor: Roberts, Helen
Degree Name: Master of Business
Degree Discipline: Accountancy and Finance
Publisher: University of Otago
Keywords: Granger Causality; Price Discovery; Credit Default Swap; Foreign Exhange; Information Transmission; Vector Autoregressive; Error Correction Model; Value at Risk
Research Type: Thesis