How Connected is the Global Sovereign Credit Risk Network?
43 Pages Posted: 22 Aug 2015 Last revised: 23 Jan 2020
Date Written: January 22, 2020
Abstract
This paper applies the Diebold-Yilmaz connectedness methodology on sovereign credit default swaps (SCDSs) to estimate the global network structure of sovereign credit risk. The level of credit risk connectedness among sovereigns, which is quite high, is comparable to the connected- ness 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.
Keywords: Sovereign Credit Risk; Systemic Risk; Connectedness; Network Estimation; Lasso; Vector Autoregression; Variance Decomposition
JEL Classification: F34, G15, C32, G23
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