Analyzing credit risk transmission to the non- financial sector in Europe: A network approach

Vol: 
43/2019
Author name: 
Gross C
Siklos PL
Year: 
2019
Month: 
June
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.

Publication file: 

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