The sovereign Credit Default Swap Spreads and Chinese Sectors Stock Market: A Causality in Quantile and Dependence Analysis

Abstract

This study established the direction, magnitude, and duration of the causality between CDS and selected Chinese stock sector at industry level. A nonparametric causality-in-quantile test and a CQ correlation test were applied to the data sampling over the daily period January 2, 2019, to January 6, 2023 covering a period marked by global shocks, including the outbreak of COVID-19 and Russia–Ukraine conflict. The empirical results reveal that CDS advances to play its economic role as a risk transfer, and to effectively predict the returns of sectors stock under bad market conditions. Moreover, the time-varying CQ correlations suggest that such amplified connectedness could be driven by extreme market circumstances in both the upper and lower quantiles. The findings provide important recommendations for investors, regulatory authorities, and policymakers to understand the pivotal roles of market sentiments in inducing co-movement between sovereign CDS spreads and selected Chinese stock sector.