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Analyzing Credit Risk Transmission to the Non-Financial Sector in Europe: A Network Approach

Christian Gross and Pierre Siklos ()

No 7218, CQE Working Papers from Center for Quantitative Economics (CQE), University of Muenster

Abstract: A high-dimensional network of European CDS spreads is modeled to assess the transmission of credit risk to the non-financial corporate sector in Europe. We build on a network connectedness approach that uses variance decompositions in vector autoregressions (VARs) to characterize the dependence structure in the panel of CDS spreads. Our main findings suggest a sectoral clustering in the CDS network, where financial institutions are located in the center of the network and non-financial as well as sovereign CDS are grouped around the financial center. The network has a geographical component re flected in differences in the magnitude and direction of real-sector risk transmission across European countries. We identify an increase in the transmission of financial and sovereign credit risk to the non-financial sector during the global financial crisis and the European debt crisis. By contrast, we find that the transmission of risk within the non-financial sector remains largely unaffected by crisis events.

Keywords: networks; financial-real linkages connectedness; systemic risk; credit risk; contagion (search for similar items in EconPapers)
JEL-codes: C01 C32 G01 G15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn, nep-eec and nep-rmg
Date: 2018-03
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Working Paper: Analyzing credit risk transmission to the non-financial sector in Europe: a network approach (2018) Downloads
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