Transmission of credit risk in Asia

  • Yiling Zha

    Student thesis: Doctoral ThesisDoctor of Philosophy


    Since the onset of the 2008 global financial crisis, significant spillover effects between the credit default swap (CDS) spreads of sovereigns and banks have been evidenced in the US and several European countries. Even though systemic risk seems more likely to be associated with banks, the role of non-financial firms in linking sovereigns and financial institutions is often crucial within Asian economies.

    This thesis attempts to facilitate an understanding of the credit risk transmission in Asia by analysing data for non-financial firms. Data for three East Asia countries (i.e. China, Japan and South Korea) and two Southeast Asia countries (i.e. Malaysia and Singapore) are analysed in order to test whether geographical proximity has an influence on credit risk interdependence in Asia. In addition, this thesis uses 1-year and 5-year CDS data enabling a comparison of findings between risk assessments over different horizons. The findings of the variation of credit risk transmission should provide some insights into either direct or indirect credit risk interdependence between sovereigns, financial institutions and non-financial firms.

    This thesis initially incorporates the changes in the CDS spreads of a sovereign debtor and that of domestic financial institutions and non-financial firms via a multivariate GARCH model; thus, spillovers in mean spreads as well as the volatility of spreads are considered. This analysis is then extended in a number of ways. Credit risk transmission is split to four groups: (i) domestic intra-sectoral, (ii) domestic cross-sectoral, (iii) regional intra-sectoral and (iv) regional cross-sectoral. The main findings evidence the strong credit risk interdependence exist within Asia given that shocks from common creditors such as Japan appears to spill over shocks to sovereigns and non-financial firms. Finally, this thesis uses a panel model to examine the effects of corporate and market factors on credit risk correlations. The findings from this part confirm the significance of trade links to credit risk interdependence in Asia. Moreover, credit risk correlations increase as the time-horizon gets longer.
    Date of Award2019
    Original languageEnglish
    SupervisorDavid Power (Supervisor) & Nongnuch Tantisantiwong (Supervisor)

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