Analyzing Credit Risk Transmission to the Non-Financial Sector in Europe: A Network Approach
|Schlüsselwörter||Finanzielle Netzwerke, Transmission von Kreditrisiko, Verbindung von Finanz- und Realsektor|
A high-dimensional network of European CDS spreads is modeled to assess the transmission of credit risk to the non-financial corporate sector in Europe. We build on a network connectedness approach that uses variance decompositions in vector autoregressions (VARs) to characterize the dependence structure in the panel of CDS spreads. Our main findings suggest a sectoral clustering in the CDS network, where financial institutions are located in the center of the network and non-financial as well as sovereign CDS are grouped around the financial center. We find that financial and sovereign risk are important drivers of corporate credit risk, particularly during crisis events. We identify an increase in the transmission of financial and sovereign credit risk to the non-financial sector during the Global Financial Crisis and the European Debt Crisis. By contrast, we find that the transmission of risk within the non-financial sector remains unaffected by crises.