How Connected is the Global Sovereign Credit Risk Network?

Gorkem Bostanci and Kamil Yilmaz ()
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Gorkem Bostanci: University of Pennsylvania

Koç University-TUSIAD Economic Research Forum Working Papers from Koc University-TUSIAD Economic Research Forum

Abstract: We apply the Diebold-Yilmaz connectedness index methodology on sovereign credit default swaps (SCDSs) to estimate the network structure of global sovereign credit risk. In particular, using the elastic net estimation method, we separately estimate networks of daily SCDS returns and volatilities for 38 countries between 2009 and 2014. Our results reveal striking differences between the network structures of returns and volatilities. In SCDS return networks, developing and developed countries stand apart in two big clusters. In the case of the SCDS volatility networks, however, we observe regional clusters among emerging market countries along with the developed-country cluster. We also show that global factors are more important than domestic factors in the determination of SCDS returns and volatilities. Finally, emerging market countries are the key generators of connectedness of sovereign credit risk shocks while severely problematic countries as well as developed countries play relatively smaller roles.

Keywords: Sovereign Credit Default Swaps; Sovereign Credit Risk; Systemic risk; Connectedness; Network Estimation; Lasso; Elastic Net; Vector Autoregression; Variance Decomposition. (search for similar items in EconPapers)
JEL-codes: C32 F34 F36 G15 G22 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2015-08
New Economics Papers: this item is included in nep-ger and nep-net
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Citations: View citations in EconPapers (19)

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Related works:
Journal Article: How connected is the global sovereign credit risk network? (2020)
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