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

57 Pages Posted: 5 Nov 2020

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 3 versions of this paper

Date Written: July, 2018

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

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 (July, 2018). ESRB: Working Paper Series No. 2018/78, Available at SSRN: https://ssrn.com/abstract=3723426

Christian Gross (Contact Author)

European Central Bank, European Systemic Risk Board ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Pierre L. Siklos

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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