Economic Links and Counterparty Risk

27 Pages Posted: 16 Mar 2012 Last revised: 22 Mar 2012

See all articles by Daniele Signori

Daniele Signori

Simon Fraser University (SFU)

Ramazan Gencay

Simon Fraser University

Date Written: March 14, 2012

Abstract

Counterparty risk is an important determinant of corporate credit spreads. However, there are only a few techniques available to isolate it from other factors. In this paper we describe a model of financial networks that is suitable for the construction of proxies for counterparty risk. Using data on the U.S. supplier-customer network of public companies, we find that, for each supplier, counterparties' leverage and jump risk are significant determinants of corporate credit spreads. Our findings are robust after controlling for several idiosyncratic, industry, and market factors.

Keywords: NARMA, network autoregression, counterparty risk, corporate credit spreads, supply networks

JEL Classification: C21, C31, C51, C58, G12

Suggested Citation

Signori, Daniele and Gencay, Ramazan, Economic Links and Counterparty Risk (March 14, 2012). Available at SSRN: https://ssrn.com/abstract=2022806 or http://dx.doi.org/10.2139/ssrn.2022806

Daniele Signori (Contact Author)

Simon Fraser University (SFU) ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

Ramazan Gencay

Simon Fraser University ( email )

Department of Economics
8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

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