Economics at your fingertips  

Network Risk in the European Sovereign CDS Market

Zornitsa Todorova

The Review of Finance and Banking, 2020, vol. 12, issue 2, 137-154

Abstract: This paper applies novel tools from spatial econometrics to measure, quantify and predict sovereign CDS spreads. Network risk is modelled by making each sovereign's CDS spread a function of the CDS spreads of its “neighbors” in the financial network. The main findings of the paper are: (1) the network model improves forecasting accuracy by 15 % to 20%; (2) exogenous financial shocks propagate in the network of sovereigns and 40 % to 50% of the total effect is due to indirect (network) effects. These findings suggest an alternative explanation to the well-known credit spread puzzle. To rationalize the findings the paper develops a simple structural network model of sovereign credit risk with financial cross-holdings and multiple equilibria

Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link) Full text (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this article

The Review of Finance and Banking is currently edited by Victor Dragota; Bogdan Negrea

More articles in The Review of Finance and Banking from Academia de Studii Economice din Bucuresti, Romania / Facultatea de Finante, Asigurari, Banci si Burse de Valori / Catedra de Finante Strada Mihai Eminescu nr.13-15, sector 1, Bucuresti, Romania. Contact information at EDIRC.
Bibliographic data for series maintained by Tatu Lucian ().

Page updated 2024-02-18
Handle: RePEc:rfb:journl:v:12:y:2020:i:2:p:137-154