Financial linkages between US sector credit default swaps markets

•Dynamic links among the US 5-year financial CDS sector index spreads are examined.•We develop a STECM model accommodating the potential nonlinearity and asymmetry.•Results show significant long-run relationships for two out of the three CDS variables.•These long-run links are asymmetric and nonlinear with two interaction regimes.•Our findings are stronger and more policy oriented when an extended STECM is used.

We investigate the dynamic relationships between the 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 period which is marked by the onset of the global financial crisis. For this purpose, we implement a Smooth Transition Error-Correction Model (STECM) to accommodate the presence of nonlinearities and asymmetry in the adjustment process of the CDS variables toward their long-run equilibrium. Our findings provide evidence of significant long-run equilibrium links for two out of the three CDS indices, which are found to be typically asymmetric and nonlinear. These findings are more potent and more strongly policy oriented when the control variables are introduced into an extended STECM.