Assessing the extent of contagion of sovereign credit risk among BRICS countries

This paper conducts an ex ante analysis to assess how sovereign credit risk is transmitted among BRICS countries. To this end, the conditional value-at-risk (CoVaR) methodology is used. Moreover, the paper makes use of the generalised forecast error decomposition to assess the contribution of key economic and financial variables of each of the BRICS countries to credit risk transmitted from China, the biggest economy among the BRICS. The findings of this paper show the existence of cross-transmission of credit risk shocks among BRICS countries, with China affecting the most other BRICS countries. However, the channel through which credit risk distress in China is transmitted to the other BRICS countries is not homogenous.