Cross-Autocorrelation, Risk Transmission and Contagion in the Global CDS Markets

Abstract

We show that the cross-autocorrelation also exists in the global CDS markets and develop an econometric model to capture the global correlation structure. We study implications on the credit risk transmission and contagion risk. We find four main results: (i) credit risk transmission is through the cross-correlation at regional rather than sectoral level; (ii) time-variation in financial sector's importance is caused by asymmetric responses to the positive and negative macro news; (iii) autocorrelation reduces the contagion risk in Asia while has little impact on other regions; (iv) contagion risks in the US and EU originate from sectors with international influence.