Global Contagion of Default Risk: A New Application Based on Cutting-Edge Asymmetric Breakpoint Technology
YANG Zihui, LI Yaxi, WANG Shudai
School of Finance, Shanghai University of Finance and Economics; Dishui Lake Advanced Finance Institute, Shanghai University of Finance and Economics; Lingnan College, Sun Yat-Sen University; School of Finance, Guangdong University of Foreign Studies; Institute of Financial Openness and Asset Management, Guangdong University of Foreign Studies
Summary:
Recently, the scale of global debt has been continuously expanding. The fluctuations in default risk within local markets can spread rapidly across different markets and industries along trade, investment, and credit channels, posing potential threats to the stable development of various countries. In response, the Central Financial Work Conference held in October 2023 pointed out the necessity to “establish a long-term mechanism to prevent and defuse local debt risks” and to “prevent the cross-region, cross-market and cross-border transmission of risks”. In this context, it is of great academic value and practical significance to study the co-movement and diversification effect of international default risk in cross-market and cross-industry transmission. It not only contributes to identifying the co-movements of default risks across different markets, but also helps to find the weak links with large default risk exposure and vulnerability to external shocks, thus providing policy implications for realizing China's financial stability and high-quality economic development. Based on the asymmetric breakpoint method, this paper adopts the default probabilities of corporate sectors in 23 countries (or regions) and 11 industries from 1995 to 2022 to construct global default risk networks, and then we capture the effects of default risk co-movement and default risk diversification respectively. The default probability data we use come from the Credit Research Initiative of the Asian Institute of Digital Finance, National University of Singapore (NUS-CRI). Firstly, this paper constructs a static default risk network and studies the default risk contagion at country (or region) level. The results suggest that the Chinese mainland demonstrates strong resilience to externally transmitted default risk. At the same time, the default risk of the Chinese mainland's corporate sector shows a low correlation with the international market, and its risk dynamic is significantly influenced by domestic factors. Furthermore, this paper calculates the net relative centrality of each country (or region), revealing that the top three markets (Hong Kong SAR, China, Singapore, and the United Kingdom) all have international financial centers, and the financial sector may be an important hub for cross-market contagion of default risk. Next, this paper uses industry-level default probability to measure the cross-market contagion of default risk within each industry and the cross-industry contagion of default risk within each country (or region). We find that the positive co-movement effect is very significant in financial industry. Hence, financial sector is the key to breaking the chain of risk contagion. Nevertheless, the cross-market risk dynamics of utilities and consumer staples show a negative diversification effect, indicating these industries' potential value in international portfolio risk diversification. Furthermore, this paper adopts the rolling estimation method to capture the dynamic evolution of the default risk network from February 1996 to June 2022. The results show that the impact of external shocks on positive and negative connection networks is asymmetric. Moreover, the trend in the density of positive connection network mirrors the trend in the number of global corporate defaults, which indicates that default events may be an important force driving the contagion of default risks. In addition, this paper studies the default risk contagion under three global crisis events, namely Global Financial Crisis, European Sovereign Debt Crisis and the COVID-19 pandemic crisis. We find that the strength of positive co-movement of default risk rises significantly during the events mentioned above. The research on industry high risk period indicates that the rising risks in real estate sector in the Chinese mainland will increase risk co-movement among major domestic industries, but do not cause risk spillover to international markets. In contrast, a surge in risk of the U.S. real estate sector could trigger a positive linkage of global default risk. Further analysis of the high-risk period in the U.S. information technology industry shows that the negative impact of the risk in the U.S. information technology industry on the Chinese mainland is relatively limited. Finally, this paper proposes several policy recommendations to guard against the default risk contagion. First, the default risk of financial industry should be closely monitored, and the national financial risk early warning system should be further improved. Second, policymakers should keep a wary eye on overseas risks and pay close attention to the fluctuation of default risks in East Asia. Third, regulators should make emergency response plans for domestic default events and ensure systemic risk in China under control.
杨子晖, 李雅茜, 王姝黛. 违约风险国际传染研究——基于前沿非对称断点技术的新应用[J]. 金融研究, 2025, 535(1): 20-38.
YANG Zihui, LI Yaxi, WANG Shudai. Global Contagion of Default Risk: A New Application Based on Cutting-Edge Asymmetric Breakpoint Technology. Journal of Financial Research, 2025, 535(1): 20-38.
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