Assessing the role of international transmission channels of sovereign risk: a multidimensional spatial econometrics approach

Abstract

PurposeThis study is the first that aims to investigate international transmission channels of sovereign risk among G20 and explore its influential factors by applying the multidimensional SAR model.Design/methodology/approachMultiple spatial weight matrices can capture the contiguity of spatial units from various dimensions, which could be exploited to improve the precision of inference as well as prediction accuracy. To the best of the authors’ knowledge, this is the first study to investigate international transmission channels of sovereign risk among G20 and explore its influential factors by applying the multidimensional SAR model.FindingsWith network structure analysis, this study finds that they contain different information content from the perspective of graphical display, node strength and correlation. Developed and emerging countries all play major roles in trade connection, while only developed countries play major roles in financial linkage. Second, by applying the multidimensional SAR model, only the spatial autocorrelation coefficients for trade and financial linkages are significant during the full sample period, which is in sharp contrast to published studies using the SAR model with a single matrix. Third, the spillover channels that play major roles in various periods are different. Only trade channel plays a role during crisis periods and it is the most important. Fourth, the spatial correlation among countries greatly amplifies the shock’s impacts on one market. And spatial effect for developed countries is larger than those for emerging countries, while the mean spatial effect of a unit shock in the USA on emerging countries is slightly greater than that on developed countries.Originality/valueMultiple spatial weight matrices can capture the contiguity of spatial units from various dimensions, which could be exploited to improve the precision of inference as well as prediction accuracy. To the best of the authors’ knowledge, this is the first study to investigate international transmission channels of sovereign risk among G20 and explore its influential factors by applying the multidimensional SAR model.