Equity Trading Activity and Credit
Spread Shock

Abstract

This article investigates how equity trading activity dynamically responds to credit spread shock. Analysis of monthly data from 1925M1 to 2013M7, using share volume turnover as a proxy, shows that equity trading activity significantly drops following a shock to credit spread. The results from the Granger-causality test show that credit spread Granger-causes equity trading activity to drop. The variance decomposition results indicate that credit spread forecasts about 1.77%, 2.25%, and 4.22% of equity trading activity at the 3-month, 6-month, and 12-month horizons, respectively.