Research Of Debt Risk Contagion Based On The Network Spillover Perspective

At present,the global economy is struggling to recover,geopolitical conflicts have intensified,and global debt has shown a characteristic trend of continuous expansion in scale,unbalanced risk distribution,and intertwined financial and fiscal risks.20th CPC National Congress stressed the bottom line against systemic financial risks once again,and the IMF repeatedly warned of the risk of debt default in emerging markets.Against this background,debt risk has become a huge threat to the stable and healthy development of the global economy,so it is of practical significance to characterize the contagion of debt risk among financial markets for preventing and resolving potential factors that cause systemic financial risk.This paper constructs time-domain and frequency-domain spillover networks based on the generalized forecast error variance decomposition method and the generalized variance decomposition spectrum representation method,focuses on the perspectives of domestic and international debt risk,by using local government bonds,urban construction investment bonds,and sovereign CDS as proxy variables for domestic local government debt and international sovereign debt respectively,to study the risk contagion with different markets and economies and reveal the size,direction and structural differences of network spillover effects.Firstly,this paper takes the domestic local debt risk as the research body and examines the risk contagion relationship between domestic local government debt and various financial markets from a network spillover perspective.It focuses on the risk transmission evolution of local government debt under the impacts of major emergencies such as the COVID-19 pandemic and financial markets’ abnormal fluctuations such as stock price declines,rising housing prices,and rising interest rates.Furthermore,the network spillover indexes are used as data,with nine macroeconomic variables added,to discuss the risk transmission mechanism between local government debt,financial markets,and the macroeconomy.This paper finds that during the whole sample period,the output and receipt of urban construction investment bonds have the highest level of network spillovers,indicating that local government debt risk is highly contagious to the financial markets.The total network spillover index between local government debt and the financial markets has obvious time-varying characteristics and is affected by the macroeconomic environment and policy.Risk contagion is more pronounced during crises,the one-way spillover levels of local government bonds and urban construction investment bonds increase substantially,and local government debt becomes a net exporter of risks during the COVID-19 pandemic.During the financial markets’ abnormal fluctuations,falling stock prices and rising interest rates increase the risk of local government debt.Rising house prices eases the risk of local government debt in the short term,but brings long-term potential risks meanwhile.Local government debt risk has been proven to have a two-way,asymmetric Granger causal relationship with financial markets and macroeconomic sectors,acting as a source and intermediary in risk transmission.The local government debt risk will not only increase due to abnormal fluctuations in the financial markets and the macroeconomy but also further magnify through the financial markets and the macroeconomic sectors,resulting in potential financial and economic risks.Secondly,this paper extends the perspective to the international level and takes the international sovereign debt risk as the research body.It examines the risk contagion relationship between the sovereign CDS market,stock market,and exchange rate market from the perspective of network spillover in the time and frequency domains.We specifically analyze the trend of risk contagion movement of national sovereign debt under the impacts of major emergencies such as the COVID-19 pandemic.Also,we further use the external network spillover index of the sovereign CDS market and the total network spillover index to represent sovereign debt risk and construct a regression model to study the transmission mechanisms of sovereign debt risk.It is found that the sovereign CDS market is closely linked with the stock market and both are risk transmitters,but weakly linked with the exchange rate market.The total network spillover index of the sovereign CDS market with the stock market and the exchange rate market is always high,which can effectively identify major contingencies.The network spillover effects among the sovereign CDS market,the stock market,and the exchange rate market are mainly affected by short-term shocks such as investor sentiment and herding effects.The spillover effect is significantly enhanced during the epidemic,the external spillover level of the sovereign CDS market of emerging economies rises greatly in the first stage of the epidemic,emerging economies become the main driver of global sovereign debt risk movements,the external spillover level of the sovereign CDS market of developed economies increased in the second stage,sovereign CDS market and stock market are the main risk transmitters.Sovereign debt risk can be transmitted through three major channels:international trade,capital flows,and investor sentiment.The scale of import and export trade and capital flows move in the same direction as sovereign debt risk under major event shocks,and investor sentiment moves inversely with sovereign debt risk.Based on the above findings,this paper puts forward the following five suggestions on how to prevent and defuse debt risks:First,pay attention to the key points and fragile subjects,and be alert to the spillover of debt risks.Second,implement differentiated regulation to block the path of risk transmission.Third,strengthen macro-prudential management to prevent risk resonance in the financial market.Fourth,improve the crisis response policies to resist the impact of emergencies.Fifth,strengthen multi-party cooperation to achieve debt sustainability.