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Analyzing credit risk transmission to the nonfinancial sector in Europe: A network approach

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  • Christian Gross
  • Pierre L. Siklos

Abstract

We use a factor model and elastic net shrinkage to model a high‐dimensional network of European credit default swap (CDS) spreads. Our empirical approach allows us to assess the joint transmission of bank and sovereign risk to the nonfinancial corporate sector. Our findings identify a sectoral clustering in the CDS network, where financial institutions are in the center and nonfinancial entities as well as sovereigns are grouped around the financial center. The network has a geographical component reflected in different patterns of real‐sector risk transmission across countries. Our framework also provides dynamic estimates of risk transmission, a useful tool for systemic risk monitoring.

Suggested Citation

  • Christian Gross & Pierre L. Siklos, 2020. "Analyzing credit risk transmission to the nonfinancial sector in Europe: A network approach," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 35(1), pages 61-81, January.
  • Handle: RePEc:wly:japmet:v:35:y:2020:i:1:p:61-81
    DOI: 10.1002/jae.2726
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    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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