Gaiyan Zhang (University of Missouri, St. Louis): Contagion and competition effects between China and the rest of the world: Evidence from the sovereign CDS markets

Gaiyan Zhang (University of Missouri, St. Louis): Contagion and competition effects between China and the rest of the world: Evidence from the sovereign CDS markets

Co-author: Wenlong Zhang (Shanxi University of Finance and Economics, China)

Abstract

We examine contagion and competition effects in sovereign credit default swaps (CDS) markets between China and 54 countries for the period 2001-2014 using the time varying rolling bootstrap Granger non-causality test. We find complex but interesting patterns of contagion and competition effects. China’s CDS spreads have strong contagion effects on those of Asian countries due to geographic proximity and also on those of resource-providing countries along the supply chain. Conversely, China’s CDS spreads are vulnerable to contagion effects from shocks in many countries, especially after the 2008 financial crisis when China’s export-oriented economy was hurt by lower foreign demand and global recession. Competition effects are limited and clustered by time and region. Furthermore, we use the probit model to explore drivers of global spillover effects from the perspective of global trade, direct investment, fund flow linkages and other country-level characteristics.

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