Credit Shock Propagation Along Supply Chains: Evidence from the CDS Market

Senay Agca, Volodymyr Babich, John Birge and Jing Wu
Additional contact information
Senay Agca: George Washington University
Volodymyr Babich: Georgetown University
Jing Wu: Chinese University of Hong Kong

Working Papers from The George Washington University, Institute for International Economic Policy

Abstract: Using a panel of Credit Default Swap (CDS) spreads and supply chain links, we observe that both favorable and unfavorable credit shocks propagate through supply chains in the CDS market. Particularly, the three-day cumulative abnormal CDS spread change (CASC) is 63 basis points for firms whose customers experienced a CDS up-jump event (an adverse credit shock). The value is 74 basis points if their suppliers experienced a CDS up-jump event. The corresponding three-day CASC values are −36 and −38 basis points, respectively, for firms whose customers and suppliers, respectively, experienced an extreme CDS down-jump event (a favorable credit shock). These effects are approximately twice as large for adverse credit shocks originating from natural disasters. Credit shock propagation is absent in inactive supply chains, and is amplified if supply-chain partners are followed by the same analysts. Industry competition and financial linkages between supply chain partners, such as trade credit and large sales exposure, amplify the shock propagation along supply chains. Strong shock propagation persists through second and third supply-chain tiers for adverse shocks but attenuates for favorable shocks.

Keywords: supply chains; credit risk; CDS; propagation; supply networks (search for similar items in EconPapers)
JEL-codes: E43 E51 G12 G14 G23 G24 G32 L11 L22 (search for similar items in EconPapers)
Pages: 71 pages
Date: 2021
New Economics Papers: this item is included in nep-fdg and nep-mac
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Citations: View citations in EconPapers (6)

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Journal Article: Credit Shock Propagation Along Supply Chains: Evidence from the CDS Market (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:gwi:wpaper:2021-18

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