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

Summary 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 sector...

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Bibliographic Details
Published in:Journal of applied econometrics (Chichester, England) Vol. 35; no. 1; pp. 61 - 81
Main Authors: Gross, Christian, Siklos, Pierre L.
Format: Journal Article
Language:English
Published: Chichester Wiley Periodicals Inc 01.01.2020
Subjects:
Clustering
Credit
Credit default swaps
Credit risk
Econometrics
Economic models
Empirical analysis
Financial institutions
Interlocking directorates
Risk
Risk analysis
Spread
Europe
ISSN:0883-7252, 1099-1255
Online Access:Get full text
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Summary:Summary 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.
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ISSN:0883-7252
1099-1255
DOI:10.1002/jae.2726