Monitoring the European CDS Market Through Networks: Implications for Contagion Risks

56 Pages Posted: 26 Mar 2014

See all articles by Laurent Clerc

Laurent Clerc

Banque de France

Silvia Gabrieli

Banque de France

Steffen Kern

European Securities and Markets Authority

Yanis El Omari

European Securities and Markets Authority

Date Written: March 2014

Abstract

Based on a unique data set referencing exposures on single name credit default swaps (CDS) on European reference entities, we study the structure and the topology of the European CDS market and its evolution from 2008 to 2012, resorting to network analysis. The structural features revealed show bilateral CDS exposures describing growing scale-free networks whose highly interconnected hubs constitute both a strength and weakness for the stability of the system. The potential "super spreaders" of financial contagion, identified as the most interconnected participants, consist mostly of banks. For some of them net notional exposures may be particularly large relative to their total common equity. Our findings also point to the importance of some non-dealer/non-bank participants belonging to the shadow banking system.

Keywords: Credit default swaps; Financial networks; Centrality measures; Contagion; Shadow banking

JEL Classification: E17, E44, E51, G21, G28

Suggested Citation

Clerc, Laurent and Gabrieli, Silvia and Kern, Steffen and El Omari, Yanis, Monitoring the European CDS Market Through Networks: Implications for Contagion Risks (March 2014). Banque de France Working Paper No. 477, Available at SSRN: https://ssrn.com/abstract=2414371 or http://dx.doi.org/10.2139/ssrn.2414371

Laurent Clerc (Contact Author)

Banque de France ( email )

Paris
France

Silvia Gabrieli

Banque de France ( email )

32 rue Croix des Petits Champs
Paris, 75001
France

Steffen Kern

European Securities and Markets Authority ( email )

103 Rue de Grenelle
Paris, 75007
France

Yanis El Omari

European Securities and Markets Authority ( email )

103 Rue de Grenelle
Paris, 75007
France

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