How connected is the global sovereign credit risk network?

This paper estimates the global network structure of sovereign credit risk by applying the Diebold-Yilmaz connectedness methodology on sovereign credit default swaps (SCDSs). The level of credit risk connectedness among sovereigns, which is quite high, is comparable to the connectedness among stock...

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Bibliographic Details
Published in:Journal of banking & finance 2020-04, Vol.113, p.105761, Article 105761
Main Authors: Bostanci, Gorkem, Yilmaz, Kamil
Format: Article
Language:English
Subjects:
Lasso
Network estimation
Sovereign credit risk
Systemic risk
Variance decomposition
Vector autoregression
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Summary:This paper estimates the global network structure of sovereign credit risk by applying the Diebold-Yilmaz connectedness methodology on sovereign credit default swaps (SCDSs). The level of credit risk connectedness among sovereigns, which is quite high, is comparable to the connectedness among stock markets and foreign exchange markets. In the aftermath of the recent financial crises that originated in developed countries, emerging market countries have played a crucial role in the transmission of sovereign credit risk, while developed countries and debt-ridden developing countries have played marginal roles. Secondary regressions show that both trade and capital flows are important determinants of pairwise connectedness across countries. The capital flows became increasingly important after 2013, while the effect of trade flows decreased during the crisis and did not recover afterwards.
ISSN:0378-4266
1872-6372
DOI:10.1016/j.jbankfin.2020.105761