Exploring Financial Market Interconnectedness Through CDS Spreads: A Network Estimation Approach

In an increasingly complex global financial system, this paper investigates the interconnectedness among financial institutions by exploiting the informational content of Credit Default Swap (CDS) spreads and their role in transmitting risk across the network of global finance. Using a network-based framework, we model the dynamic interdependencies among CDS spreads through the NETS (Network Estimation for Time Series) algorithm combined with Granger causality analysis. This methodology enables the construction of financial networks, through which we identify the principal actors driving contagion within the financial system. The results reveal a surprisingly central role of non-bank financial institutions in the contagion network—particularly insurance companies—partially challenging traditional assumptions that place banks at the core of systemic risk transmission. Moreover, risk transmission appears distributed rather than geographically concentrated, suggesting the importance of cross-border connections. The study also stimulates debate at the regulatory level, highlighting the need to strengthen regulation across different types of financial institutions, rather than focusing exclusively on banking sector supervision and monitoring.