Cross-market risk spillovers among sovereign CDS, stock, foreign exchange and commodity markets: An interacting network perspective

Abstract

With the globalisation of the economy and financial markets, cross-market risk spillovers have become increasingly prominent, affecting global financial stability. Using the Diebold-Yilmaz Connectedness Index (DYCI) method, we construct interacting networks to explore these risk spillovers across four multi-country markets: sovereign credit default swap (SCDS), stock, foreign exchange, and commodity markets. We find: First, at the system-level, multiple inter-layer connections between the SCDS and other markets demonstrate the high level of cross-market risk spillovers. They are sensitive to major economic and financial events, such as the COVID-19 pandemic and Russia-Ukraine conflict. SCDS has the closest spillovers with stocks. The block model analysis shows that all relationships between various blocks contain inter-layer connections, and the SCDSs of emerging countries and stocks of developed countries are the sources of risk spillover in the entire system. Second, at the country-level, SCDS' cross-market spillover strength changes by country and time. Five cross-node centrality analysis shows that the SCDSs of emerging countries are the risk spillover engines between the SCDS and other markets. The spillovers of a country's SCDS to gold (oil) are more sensitive to the Fed rate hike in 2016 (the European debt crisis and Russia-Ukraine conflict). Third, to understand the driving factors, we perform time series and panel regressions for cross-market risk spillovers and cross-node centrality, respectively. The influences of economic fundamentals and market sentiment are asymmetric in high- and low-risk spillovers. The greater the total economic linkages, such as trade and capital flows, the greater are the countries' cross-market risk spillovers.