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Sovereign Debt Crises and Financial Contagion: Estimating Effects in an Endogenous Network

Author

Listed:
  • Seth Richards-Shubik

    (Carnegie Mellon University)

  • Brent Glover

    (Carnegie Mellon University)

Abstract

In an integrated global financial system, a sovereign default raises concerns of financial contagion to other countries. We develop and estimate an equilibrium model featuring a network of international borrowing and lending. In the model, the network structure of borrowing-lending relationships arises endogenously and results in the propagation of financial shocks across countries. We estimate the model using data on foreign claims among a network of 20 countries over six years. Simulating counterfactual experiments from the estimated model, we find a non-trivial role for financial contagion. The default of a sovereign in the network has a noticeable effect on the borrowing costs and default probabilities of other network members.

Suggested Citation

  • Seth Richards-Shubik & Brent Glover, 2013. "Sovereign Debt Crises and Financial Contagion: Estimating Effects in an Endogenous Network," 2013 Meeting Papers 1176, Society for Economic Dynamics.
    • Handle: RePEc:red:sed013:1176
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    Cited by:

    1. Augustin, Patrick & Subrahmanyam, Marti G. & Tang, Dragon Yongjun & Wang, Sarah Qian, 2014. "Credit Default Swaps: A Survey," Foundations and Trends(R) in Finance, now publishers, vol. 9(1-2), pages 1-196, December.
    2. Le, Chau & Dickinson, David & Le, Anh, 2022. "Sovereign risk spillovers: A network approach," Journal of Financial Stability, Elsevier, vol. 60(C).

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