Essays on intra- and inter-industry contagion of credit risk

Abstract

This dissertation consists of two essays on intra- and inter-industry contagion of credit risk in the credit default swap market. The first essay suggests a new measure to identify supply-chain among industries based on input-output accounts to analyze inter-industry effects of filings for bankruptcies. The filings for Chapter 11 bank-ruptcy have wider inter-industry contagion effects beyond the supplier and customer industries identified with inter-firm linkage in the previous study. Since the supply chain based on input-output accounts enables much more bankruptcies to be considered to examine inter-industry effects of flings for Chapter 11 bankruptcies, thus the characteristics of filing-firms’ industries are shown to be related to inter-industry contagion effects of them. The second essay considers the prior ratings of the event-firms, and their reactions in the credit default swap market and the stock market to investigate intra-industry effects of bond rating changes, such as upgrade and downgrade. Both rating changes cause the event-firms to be affected significantly, but have no impact on intra-industry rivals on average. However, industry rivals experience competition effects when rating downgrade for the event-frim with investment grade as the prior rating leads to its wealth transference from bondholder to stockholders. And rating downgrade causes industry rivals to experience contagion effects when the event-firm with speculative grade suffer from it in the credit default swap market.