How Connected is the Global Sovereign Credit Risk Network?

43 Pages Posted: 22 Aug 2015 Last revised: 23 Jan 2020

See all articles by Gorkem Bostanci

Gorkem Bostanci

University of British Columbia ; affiliation not provided to SSRN

Kamil Yilmaz

Koc University

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

Suggested Citation

Bostanci, Gorkem and Bostanci, Gorkem and Yilmaz, Kamil, How Connected is the Global Sovereign Credit Risk Network? (January 22, 2020). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2647251 or http://dx.doi.org/10.2139/ssrn.2647251

Gorkem Bostanci

University of British Columbia ( email )

997-1873 East Mall
Vancouver, BC V6T 1Z1
Canada

HOME PAGE: http://https://www.gorkembostanci.com/

affiliation not provided to SSRN

Kamil Yilmaz (Contact Author)

Koc University ( email )

Rumeli Feneri Yolu
Sariyer
Istanbul, 34450
Turkey
+90 212 338 1458 (Phone)
+90 212 338 1653 (Fax)

HOME PAGE: http://https://sites.google.com/view/kamilyilmaz/

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
378
Abstract Views
1,953
Rank
144,018
PlumX Metrics