Impact of Credit Risk on Stock Market and Short-Term Financing: Evidence From the U.S. Market
Impact of Credit Risk on Stock Market and Short-Term Financing: Evidence From the U.S. Market

Author(s): Samet Günay
Subject(s): Supranational / Global Economy, Methodology and research technology, Financial Markets
Published by: Özgür Yayın Dağıtım Ltd. Şti.
Keywords: Stock Market; Credit risk; U.S. equity market;
Summary/Abstract: In this study, we examine the impact of two leading credit risk indicators (ABX.HE and CDX.NA.IG indexes) on the U.S. equity market (the Dow Jones Industrial Average index, DJIA) and short-term financing stress (TED spread) through asymmetric causality and Markov Regime-Switching regression analysis. According to the findings, CDX.NA.IG dominates ABX.HE index both in negative and positive returns. Additionally, it appears to be more impactful over the U.S. equity market and short-term financing stress. Markov Regime-Switching regression analysis shows that CDX.NA.IG negatively affects the U.S. equity market returns and escalates the short-term financing stress in expansionary and contractionary regimes. These effects become considerably higher during financial turmoil. Based on our findings, we suggest market participants monitor the CDX.NA.IG index for potential trend reversals in the equity market and liquidity crunch in the debt market. This attention would help in working capital management.

• Details
• Contents