Credit Shock Propagation Along Supply Chains: Evidence from the CDS Market

61 Pages Posted: 4 Dec 2017 Last revised: 2 Mar 2020

See all articles by Senay Agca

Senay Agca

George Washington University - School of Business, Department of Finance

Volodymyr Babich

McDonough School of Business, Georgetown University

John R. Birge

University of Chicago - Booth School of Business

Jing Wu

The Chinese University of Hong Kong (CUHK) - CUHK Business School

Date Written: November 27, 2017

Abstract

Using a panel of Credit Default Swap (CDS) spreads and supply chain links, we observe that both favorable and unfavorable credit shocks propagate through supply chains in the CDS market. Particularly, the three-day cumulative abnormal CDS spread change (CASC) is 63 basis points for firms whose customer experienced a CDS up-jump event (that is, an adverse credit shock). The value is 74 basis points if a supplier experienced a CDS up-jump event. The corresponding three-day CASC values are −36 and −38 basis points, respectively, for firms whose customer and supplier,respectively, experienced an extreme CDS down-jump event (that is, a favorable credit shock). Such effects do not exist in inactive supply chains. The credit shock propagation is substantially more pronounced if supply-chain partners are followed by the same analysts. Industry competition and financial linkages between supply chain partners, such as trade credit and large sales exposure, amplify the shock propagation along supply chains. Strong shock propagation persists through second and third supply-chain tiers for adverse shocks, but attenuates for favorable shocks.

Keywords: supply chains, credit risk, CDS, propagation, supply networks

JEL Classification: E43, E51, G12, G14, G23, G24, G32, L11, L22

Suggested Citation

Agca, Senay and Babich, Volodymyr and Birge, John R. and Wu, Jing, Credit Shock Propagation Along Supply Chains: Evidence from the CDS Market (November 27, 2017). Georgetown McDonough School of Business Research Paper No. 3078752, Available at SSRN: https://ssrn.com/abstract=3078752 or http://dx.doi.org/10.2139/ssrn.3078752

Senay Agca

George Washington University - School of Business, Department of Finance ( email )

2201 G Street
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HOME PAGE: http://sites.google.com/site/senayagcaweb/

Volodymyr Babich

McDonough School of Business, Georgetown University ( email )

3700 O Street, NW
Washington, DC 20057
United States

John R. Birge

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Jing Wu (Contact Author)

The Chinese University of Hong Kong (CUHK) - CUHK Business School ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Shatin, N.T.
Hong Kong

HOME PAGE: http://www.jingwulab.org

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