This article tests the lead–lag relationship between the credit default swap (CDS) and the stock markets during the global financial crisis of 2008 and the COVID-19 pandemic for companies across the United States, the European Union and the United Kingdom.
The Granger causality test augmented by explanatory variables.
The stock market had a strong lead over the CDS market during the 2008 crisis, whereas they were about even during the COVID-19 pandemic. The EU CDS market was the only one to lead the stock market in any sub-period, although the lead was not as strong as the stock market normally had. The lead-lag relationship highlighted a potentially crisis period for the markets, 2016–2017, where the stock market had the weakest lead over the CDS market before the COVID-19 pandemic in the United States and the United Kingdom, while the CDS market took the lead in the European Union.
This is the first time the lead-lag relationship between the CDS and the stock markets is tested on the same set of companies over an extended period covering both crises (the 2008 crisis and the COVID-19 pandemic) and a period in between. Moreover, articles on the lead–lag relationship are usually focused on companies within one country, whereas this article provides an international comparison.
