Spillover effects across credit spreads in Korean bond market

Abstract

Following Diebold and Yilmaz (2009, 2012) with generalized fore - cast error variance decompositions, we measure spillover effects across the credit spreads of different bond ratings in Korea. The es - timation results suggest that approximately 35 percent of the fluc - tuations 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 re - veal that spillover effects are stronger during the period of financial crisis