Unveiling the asymmetric dynamic spillovers in industry bond credit risk: Is the energy industry the prime mover?

Abstract

This study employs a novel asymmetric time-varying parameter vector autoregressive (TVP-VAR) based connectedness approach to examine the dynamic return connectedness between industry bond credit spreads in China. This study specifically focuses on identifying the factors that contribute to connectedness. The empirical findings suggest that (1) the average total connectedness index (TCI) remains consistently high throughout the period, with particularly noteworthy surges during crises such as the COVID-19 epidemic and the Russia-Ukraine war. (2) The TCI for positive returns is greater than that for negative returns for the industry bond credit spread. This confirms that the strength of inter-industry connections grows when there is an increase in credit risk in the bond market. (3) The power and coal industries are net transmitters of credit risk, while the gas and new energy industries are net receivers. This tendency is particularly noticeable in the overall returns and the positive returns spillover systems. (4) The spillover of credit risk in the industry bond market can be attributed to the connections within the supply chain among different industries. Core industries, including transportation, real estate, and non-bank financial industries, typically play a major role as net transmitters, whereas non-core industries usually as receivers. (5) The TCI is heavily influenced by global shocks, such as international oil volatility, global climate transition risk, U.S. economic policy uncertainty, and global geopolitical risks.