The cross-country transmission of credit risk between sovereigns and firms in Asia

Yi Zha (Lead / Corresponding author), Nuch Tantisantowong, David Power

Research output: Contribution to journalArticlepeer-review

Abstract

This paper uses Credit Default Swap (CDS) data for Asian reference entities to examine cross-country credit risk spillover effects between sovereigns and firms. Data for three East Asian countries (China, Japan and South Korea) over the period 2009-2018 are analysed. We analyse changes in the CDS spreads of a sovereign debtor and those of a foreign firm via a bivariate GARCH-full-BEKK model; thus, spillovers in mean spread changes as well as in volatility are considered. The main findings indicate that strong credit risk interdependence exists between the East Asian countries given that credit shocks from a common creditor such as Japan appear to spill over to the other two Asian nations. Compared to their non-financial counterparts, financial institutions are more sensitive than non-financial firms to changes in the credit risk of a foreign sovereign debtor; financial institutions such as banks may hold debt of foreign sovereigns which makes their CDSs sensitive to this source of credit risk.
Original languageEnglish
Number of pages12
JournalQuarterly Review of Economics and Finance
Early online date17 May 2020
DOIs
Publication statusE-pub ahead of print - 17 May 2020

Keywords

  • Asia
  • Credit risk
  • Cross-country
  • Spillover effects

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