Linkages between Financial Sector CDS Spreads and Macroeconomic Influence in a Nonlinear Setting

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 including the world financial crisis. We employ the nonlinear ARDL model (NARDL) to account for the shortand long-run asymmetries in the sensitivity of 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 sreads These findings are important for policy-makers who deal credit risks at sector levels.