Cross-market risk spillovers among sovereign CDS, stock, foreign exchange and commodity markets: An interacting network perspective

Wei-Qiang Huang and Peipei Liu

International Review of Financial Analysis, 2023, vol. 90, issue C

Abstract: With the globalisation of the economy and financial markets, cross-market risk spillovers have become increasingly prominent, affecting global financial stability. Using the Diebold-Yilmaz Connectedness Index (DYCI) method, we construct interacting networks to explore these risk spillovers across four multi-country markets: sovereign credit default swap (SCDS), stock, foreign exchange, and commodity markets. We find: First, at the system-level, multiple inter-layer connections between the SCDS and other markets demonstrate the high level of cross-market risk spillovers. They are sensitive to major economic and financial events, such as the COVID-19 pandemic and Russia-Ukraine conflict. SCDS has the closest spillovers with stocks. The block model analysis shows that all relationships between various blocks contain inter-layer connections, and the SCDSs of emerging countries and stocks of developed countries are the sources of risk spillover in the entire system. Second, at the country-level, SCDS' cross-market spillover strength changes by country and time. Five cross-node centrality analysis shows that the SCDSs of emerging countries are the risk spillover engines between the SCDS and other markets. The spillovers of a country's SCDS to gold (oil) are more sensitive to the Fed rate hike in 2016 (the European debt crisis and Russia-Ukraine conflict). Third, to understand the driving factors, we perform time series and panel regressions for cross-market risk spillovers and cross-node centrality, respectively. The influences of economic fundamentals and market sentiment are asymmetric in high- and low-risk spillovers. The greater the total economic linkages, such as trade and capital flows, the greater are the countries' cross-market risk spillovers.

Keywords: Cross-market risk spillovers; Sovereign CDS; Interacting network; Block model; Driving factors (search for similar items in EconPapers)
JEL-codes: F31 F34 G15 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:90:y:2023:i:c:s1057521923003915

DOI: 10.1016/j.irfa.2023.102875

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