Spillover effects across credit spreads in Korean bond market

Abstract

Following Diebold and Yilmaz (2009, 2012) with generalized forecast error variance decompositions, we measure spillover effects across the credit spreads of different bond ratings in Korea. The estimation results suggest that approximately 35 percent of the fluctuations in credit spreads are explained by spillover effects. We also find asymmetry in the spillover effects: a shock to a credit spread tends to spillover more strongly into lower-rated spreads than into higher rated spreads. Rolling regression and sub-sample results reveal that spillover effects are stronger during the period of financial crisis.