Eric Girardin : eric.girardin[at]univ-amu.fr
Christelle Lecourt : christelle.lecourt[at]univ-amu.fr
Obtaining spillover effects from variance decompositions has found widespread use in the literature. However, spillovers arising out of interconnectedness, for example, between financial assets can be further decomposed into both sources of shocks and whether they amplify or dampen volatility conditions in the target market. We show how to use historical decompositions to rearrange the information from a VAR to include the sources, direction and signs of spillover effects. We apply the methodology to a panel of CDS spreads of sovereigns and financial institutions for the period 2003-2013 and show how they contribute to changes in credit risk. Significantly, we are able to discriminate between positive and negative shocks in a manner not done previously and, therefore, provide new insights into the evolution of CDS interconnectedness across various dimensions.