Network Risk in the European Sovereign CDS Market
Keyword(s):
This paper applies novel tools from spatial econometrics to measure, quantifyand predict sovereign CDS spreads. Network risk is modelled by making each sovereignísCDS spread a function of the CDS spreads of its ìneighborsî in the Önancial network. Themain Öndings of the paper are: (1) the network model improves forecasting accuracy by 15% to 20%; (2) exogenous Önancial shocks propagate in the network of sovereigns and 40 %to 50% of the total e§ect is due to indirect (network) e§ects. These Öndings suggest analternative explanation to the well-known credit spread puzzle. To rationalize the Öndingsthe paper develops a simple structural network model of sovereign credit risk with Önancialcross-holdings and multiple equilibria.
Keyword(s):
2021 ◽
Vol ahead-of-print
(ahead-of-print)
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2016 ◽
pp. 561-586
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