Cross-Autocorrelation, Risk Transmission and Contagion in the Global CDS Markets

55 Pages Posted: 19 Apr 2021 Last revised: 13 Dec 2021

See all articles by Charlie X. Cai

Charlie X. Cai

University of Liverpool Management School

May Hu

RMIT University

Xiaoxia Ye

University of Liverpool Management School

Date Written: December 11, 2021

Abstract

We show that the cross-autocorrelation also exists in the global CDS markets and develop an econometric model to capture the global correlation structure. We study implications on the credit risk transmission and contagion risk. We find four main results: (i) credit risk transmission is through the cross-correlation at regional rather than sectoral level; (ii) time-variation in financial sector's importance is caused by asymmetric responses to the positive and negative macro news; (iii) autocorrelation reduces the contagion risk in Asia while has little impact on other regions; (iv) contagion risks in the US and EU originate from sectors with international influence.

Keywords: CDS, cross-autocorrelation, VAR, global credit network, risk transmission, contagion risk, network centrality

JEL Classification: F44, G15, G11

Suggested Citation

Cai, Charlie Xiaowu and Hu, May and Ye, Xiaoxia, Cross-Autocorrelation, Risk Transmission and Contagion in the Global CDS Markets (December 11, 2021). Available at SSRN: https://ssrn.com/abstract=3826385 or http://dx.doi.org/10.2139/ssrn.3826385

Charlie Xiaowu Cai

University of Liverpool Management School ( email )

University of Liverpool
Liverpool, L69 7ZA
United Kingdom

May Hu

RMIT University

124 La Trobe Street
Melbourne, 3000
Australia

Xiaoxia Ye (Contact Author)

University of Liverpool Management School ( email )

Chatham Street
Liverpool, L69 7ZH
United Kingdom

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