Analyzing Credit Risk Transmission to the Non- Financial Sector in Europe: A Network Approach

63 Pages Posted: 24 Jun 2019

See all articles by Christian Gross

Christian Gross

European Central Bank, European Systemic Risk Board

Pierre L. Siklos

Wilfrid Laurier University - School of Business & Economics; Balsillie school of international affairs

Multiple version iconThere are 2 versions of this paper

Date Written: May 31, 2019

Abstract

We use a factor model and elastic net shrinkage to model a high-dimensional network of European CDS spreads. Our empirical approach allows us to assess the joint transmission of bank and sovereign risk to the non-financial corporate sector. Our findings identify a sectoral clustering in the CDS network, where financial institutions are in the center and non-financial 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.

Keywords: networks, financial-real linkages, connectedness, systemic risk, credit risk, contagion, large datasets

JEL Classification: C32, C38, C55, F3, G01, G15

Suggested Citation

Gross, Christian and Siklos, Pierre L., Analyzing Credit Risk Transmission to the Non- Financial Sector in Europe: A Network Approach (May 31, 2019). CAMA Working Paper No. 43/2019. Available at SSRN: https://ssrn.com/abstract=3408894 or http://dx.doi.org/10.2139/ssrn.3408894

Christian Gross

European Central Bank, European Systemic Risk Board ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Pierre L. Siklos (Contact Author)

Wilfrid Laurier University - School of Business & Economics ( email )

Department of Economics
75 University Avenue W.
Waterloo, Ontario N2L 3C5
Canada
519-884-0710 Ext.. 3491 (Phone)

HOME PAGE: http://pierrelsiklos.com

Balsillie school of international affairs ( email )

67 Erb Street West
Waterloo, ON N2L 6C2
Canada

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