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European systemic credit risk transmission using Bayesian networks

Author

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  • Ballester, Laura
  • López, Jesúa
  • Pavía, Jose M.

Abstract

The analysis of systemic credit risk is one of the most important concerns within the financial system. Its complexity lies in adequately measuring how the transmission of systemic default spreads through assets or financial markets. The transmission structure of systemic credit risk across several European sectoral CDS is studied by dynamic Bayesian networks. The new approach allows for a more advanced analysis of systemic risk transmission, including long-term and more complex relationships. The modelling reveals as relevant only relationships between the original series and one- and two-lagged series. Network structure learning displays a robust and stationary underlying risk transmission structure, pointing to a consolidated transmission mechanism of systemic credit risk between CDSs. Between 5 % and 40 % of sectoral CDS series variances are explained by the network relationships. The modelling allows us to ascertain which relationships between the CDS series show positive (amplifier) and negative (reducer) effects of systemic risk transmission.

Suggested Citation

  • 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).
    • Handle: RePEc:eee:riibaf:v:65:y:2023:i:c:s0275531923000405
    DOI: 10.1016/j.ribaf.2023.101914
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    References listed on IDEAS

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    1. Curcio, Domenico & Gianfrancesco, Igor & Onorato, Grazia & Vioto, Davide, 2024. "Do ESG scores affect financial systemic risk? Evidence from European banks and insurers," Research in International Business and Finance, Elsevier, vol. 69(C).

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    More about this item

    Keywords

    CDS; Systemic credit risk; Dynamic Bayesian networks; Vector autoregressive moving average models; Markov Chain Monte Carlo;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C45 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Neural Networks and Related Topics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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