Dynamic credit risk transmissions among global major industries: Evidence from the TVP-VAR spillover approach

Abstract

We examine the dynamics of credit risk connectedness by analyzing credit default spreads in four major sectors (banks, transportation, manufacturing, electricity) across three global regions (Asia, Europe, North America) using the TVP-VAR spillover methodology from 2007 to 2024. We have identified significant findings regarding credit risk spillovers among them. First, there are consistently high levels of credit risk spillovers between sectors, indicating underlying economic factors influencing the transmission of credit risk shocks. Second, notable regional findings include a substantial increase in credit risk connectedness for Asian banks during the global financial crisis (GFC). European manufacturing sectors also displayed significantly high connectedness levels during both the GFC and the COVID-19, while North American banks saw a notable surge due to the collapse of Silicon Valley Banks (SVB) in March 2023. In addition, during the RU-war, the electricity and manufacturing sectors in Europe had high CDS connectedness. Lastly, a distinct observation emerged concerning the Asian transportation sector. These findings have practical implications for policymakers and portfolio managers. For instance, they can help policymakers assess the effectiveness of their policies by revealing global industry credit risk interconnections. Additionally, the dynamic credit risk linkages provide strategies for hedging credit risk.