Network-Based Identification of Risk Contagion Pathways Between U.S. Credit and Equity Markets During Stress Periods

Abstract

This paper investigates risk contagion pathways between U.S. credit and equity markets during periods of financial stress through network-based methodologies. The study constructs both correlation- and Granger-causality-based networks to identify transmission channels and quantify contagion intensity across market segments from 2008 to 2024. Using daily credit default swap (CDS) spreads and equity sector indices, we analyze the evolution of network topology during three major stress episodes: the 2008 financial crisis, the 2020 COVID-19 market turbulence, and the 2023 regional banking stress. Network centrality measures reveal systemically important transmission nodes, while time-varying connectivity patterns demonstrate significant amplification of cross-market linkages during stress periods. The empirical findings indicate that financial sector stocks serve as primary transmission channels from credit to equity markets, with contagion strength increasing sharply (more than threefold) during crisis periods compared to normal times. The research provides quantitative evidence for regulatory frameworks focused on systemic risk monitoring and contributes methodological insights for identifying vulnerable transmission pathways in interconnected financial systems.