Corporate credit risk counter-cyclical interdependence: A systematic analysis of cross-border and cross-sector correlation dynamics

Sectoral corporate credit risk interlinkages constitute a highly topical issue for the systemic risk con-siderations of policymakers and market practitioners. We reveal the macroeconomic drivers of dynamic correlations between European and US sectoral Credit Default Swaps (CDS) markets. The CDS conditional equicorrelations are explained by common macro-financial and news proxies. Our results demonstrate the counter-cyclical behaviour of the time-varying sectoral CDS interdependence, that is elevated sectoral correlations are associated with higher economic policy and financial uncertainty, stronger infectious dis-ease news impact on equity markets, tighter credit conditions, economic activity slowdown, and nega-tive sentiment. We further focus on economic policy uncertainty (EPU) as a potent catalyst of the CDS markets integration process and conclude that EPU magnifies the macro effects across credit risk corre-lations. Moreover, crisis events play a crucial role in the time-varying impact of the correlation macro drivers. Both financial and health crises amplify the influence that the macro factors exert on the evolu-tion of credit risk correlations, leading to credit risk contagion and threatening financial stability. Lastly, we show that understanding the credit contagion mechanisms has clear implications for operational re-search applications on risk and portfolio management.(c) 2022 Elsevier B.V. All rights reserved.