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

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  • Christian Gross
  • Pierre L. Siklos

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.

Suggested Citation

  • Christian Gross & Pierre L. Siklos, 2018. "Analyzing Credit Risk Transmission to the Non-Financial Sector in Europe: A Network Approach," CQE Working Papers 7218, Center for Quantitative Economics (CQE), University of Muenster.
  • Handle: RePEc:cqe:wpaper:7218
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    More about this item

    Keywords

    networks; financial-real linkages connectedness; systemic risk; credit risk; contagion;
    All these keywords.

    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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