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Bank credit risk networks: Evidence from the Eurozone

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  • Brownlees, Christian
  • Hans, Christina
  • Nualart, Eulalia

Abstract

This work proposes a credit risk model for large panels of financial institutions in which default intensity interdependence is induced by exposure to common factors as well as dependence between entity specific idiosyncratic shocks. In particular, the idiosyncratic shocks have a sparse partial correlation structure that we call the bank credit risk network. A lasso estimation procedure is introduced to recover the network from CDS data. The methodology is used to study credit risk interdependence among European financial institutions. The analysis shows that the network captures a substantial amount of interconnectedness in addition to what is explained by common factors.

Suggested Citation

  • Brownlees, Christian & Hans, Christina & Nualart, Eulalia, 2021. "Bank credit risk networks: Evidence from the Eurozone," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 585-599.
    • Handle: RePEc:eee:moneco:v:117:y:2021:i:c:p:585-599
    DOI: 10.1016/j.jmoneco.2020.03.014
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    Cited by:

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    5. Beibei Zhang & Xuemei Xie & Chunmei Li, 2023. "How Connected Is China’s Systemic Financial Risk Contagion Network?—A Dynamic Network Perspective Analysis," Mathematics, MDPI, vol. 11(10), pages 1-19, May.
    6. Mikhail Stolbov & Daniil Parfenov, 2023. "Credit risk linkages in the international banking network, 2000–2019," Risk Management, Palgrave Macmillan, vol. 25(3), pages 1-38, September.
    7. Ballester, Laura & López, Jesúa & Pavía, Jose M., 2023. "European systemic credit risk transmission using Bayesian networks," Research in International Business and Finance, Elsevier, vol. 65(C).
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    9. Atasoy, Burak Sencer & Özkan, İbrahim, 2024. "Correlation meets causality: A holistic measure of financial contagion," Finance Research Letters, Elsevier, vol. 65(C).

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    More about this item

    Keywords

    Credit risk; Networks; CDS; Lasso;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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