Analyzing Credit Risk Transmission to the Non-Financial Sector in Europe: A Network Approach
57 Pages Posted: 5 Nov 2020
Date Written: July, 2018
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
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