Time-varying co-movements and volatility spillovers among financial sector CDS indexes in the UK

• We studied dynamic linkages between the three UK financial sector CDS indexes.
• Sharp increases in the correlations were found for all pairs after the Lehman shock.
• The conditional correlations for two pairs decreased after the zenith of the debt crisis.
• The banking sector was a consistent net transmitter of volatility spillovers.
• Other financial sectors also transmitted volatility on a net basis for some periods.

This article investigates co-movements and volatility spillovers between the three UK financial sector CDS indexes over time. We find sharp increases in the dynamic conditional correlations for all pairs after the Lehman shock, indicating evidence of contagion, and decreases for two pairs (banking-life insurance and life insurance-other financial) after the zenith of the European debt crisis, implying the emergence of diversification opportunities. Dynamic spillover index measures suggest that, although the banking sector was a dominant net transmitter of volatility, other financial sectors also became net transmitters for some periods, highlighting the importance of appropriate regulation of these two sector areas.

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