Financial Contagion in International Supply-Chain Networks

This paper studies the role of cross-border supply-chains for international financial contagion. Following large country-level shocks abroad, such as country-index return jumps and natural disasters, the dynamic conditional correlation (DCC) of stock returns between U.S. suppliers and their international customers increases by 7% of a standard deviation relative to matched placebo firm-pairs. This increase is beyond any country- or industry-effects and persists for 20 weeks. Consistent with a credit-chain mechanism, I find a significant increase in supplier CDS spreads following such shocks, and document that contagion is increasing with trade credit usage, customer shock exposure, and cost of bankruptcy resolution