Linkages between financial sector CDS spreads and macroeconomic influence in a nonlinear setting

- The paper examines asymmetric and nonlinear transmissions for sector CDS spreads.
- The model is NARDL and CDSs are for bank, financial service and insurance sectors.
- The influences come from the financial, equity risk and energy price factors.
- There is evidence of short- and long-run nonlinearities and asymmetries for the CDSs.
- There are also short- and long-run asymmetries in the economic and risk influences.

This paper investigates the asymmetric and nonlinear transmission of financial and energy prices to US five-year financial CDS sector index spreads for the banking, financial services and insurance sectors in the short- and long-run over the recent periods revolving around the global financial crisis. We employ the nonlinear ARDL (NARDL) model to account for the short- and long-run asymmetries in the sensitivity of those CDS sector index spreads to their determinants. Our findings suggest that there is evidence of short- and long-run nonlinearities and asymmetries in the adjustment process of the three CDS variables. There are also short- and long-run asymmetries in the influences of macroeconomic and financial variables on the CDS sector spreads. These findings are important for policymakers who deal with credit risks at the sector levels.