Multiscale cross-sector tail credit risk spillovers in China: Evidence from EEMD-based VAR quantile analysis

Abstract

This paper employs EEMD-based VAR for VaR methodology to explore the spillovers of credit risk across sectors in China, focusing on multiple time scales and tail effects. Analysis of daily sectoral CDS spreads reveals that the extent and direction of cross-sector tail risk spillovers vary across sectors and time horizons, showing more pronounced effects in the medium to long term. Notably, the most substantial upside tail credit risk spillovers have been found from the Government sector to others. Moreover, asymmetric spillovers are verified at all time scales, and the extent of these spillovers varies depending on the conditioning quantiles. Finally, the results of the multiscale pseudo quantile impulse response analysis show that sectoral tail credit risk is more sensitive to negative shocks from other sectors than to positive ones, with responses decaying at a slower rate for negative shocks. These findings provide valuable insights for investors and regulators.