Network Topology of Dynamic Credit Default Swap Curves of Energy Firms and the Role of Oil Shocks

Abstract

Using network analysis on the connectedness of default factors in a credit default swap (CDS) dataset of U.S. and European energy firms, we provide the first evidence of differences in the shape and dynamics of the interconnectedness of the level, slope, and curvature, representing long-, short- and middle-term default factors, respectively. The interconnectedness of the three default factors increases during the European sovereign debt crisis (ESDC), whereas only the interconnectedness of the level factor increases during the oil price crash, and the interconnectedness of both level and slope factors spikes during COVID19. European firms contribute more to the transmission of long-term and short-term default risk from early 2011 till the beginning of the 2014–2105 oil price crash; afterwards, U.S. firms are major default transmitters despite some periods of parity with European firms. The impacts of oil demand and supply shocks on the various interconnectedness are quantile-dependent and more pronounced in the long term for the credit risk of the energy firms.