Measuring the default risk of sovereign debt from the perspective of network

TL;DR

This paper introduces a network-based model to measure sovereign debt default risk, utilizing debt-credit relations and empirical data to assess systemic risk in international finance.

Contribution

It proposes a novel network model for default risk measurement based on debt-credit relations, differing from traditional methods.

Findings

The risk index correlates with sovereign debt default risk.

The index helps regulators assess interconnectivity and systemic risk.

Empirical results validate the model's effectiveness.

Abstract

Recently, there has been a growing interest in network research, especially in these fields of biology, computer science, and sociology. It is natural to address complex financial issues such as the European sovereign debt crisis from the perspective of network. In this article, we construct a network model according to the debt--credit relations instead of using the conventional methodology to measure the default risk. Based on the model, a risk index is examined using the quarterly report of consolidated foreign claims from the Bank for International Settlements (BIS) and debt/GDP ratios among these reporting countries. The empirical results show that this index can help the regulators and practitioners not only to determine the status of interconnectivity but also to point out the degree of the sovereign debt default risk. Our approach sheds new light on the investigation of quantifying the systemic risk.