The Institutional Incentives of Systemic Financial Risk in Bond Market:Evidence from Cross-Default Clauses
The majority of extant literature examines the sources of systemic financial risk in the bond market through the lens of specific economic linkages,this paper builds upon the fact that bond default risk is contagious across industries and regions.It further proves that cross-default clauses serve to exacerbate systemic financial risk in the bond market by facilitating the further dissemination of default risk that accompanies individual defaults within the same industry and region to newly issued bonds.The amplification of risk generated by cross-default clauses is more pronounced when a greater number of debt default entities and a wider range of defaults are stipulated in the cross-default clauses.In particular,defaults in the supply chain,as well as defaults of top enterprises in the industry and the region,serve to further disseminate the default risks along the cross-default clauses to the newly issued bonds.Further analysis also indicates that defaults on bonds within the same industry and region result in creditors reducing long-term credit facilities to debt issuers with cross-default clauses.Additionally,creditors in the supply chain reduce the commercial credit of such firms.
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