Abstract: Credit risk contagion is more likely to happen across the subsidiary firms in an enterprise group because of the various types of connections. The lack of sense in detecting and controlling this credit risk contagion may trigger the dramatical loss to the financial institutions. In this paper, we focus on the extreme co-movements of default in an enterprise group in China. First, the credit risk is measured by calculating Distance-to-Default based on KMV model. Then, the dynamic Joe-Clayton copula model, which provides the flexible tail-dependence parameters, is applied to analyze the credit risk contagion in enterprise group. Finally, both macro-economic and micro-economic factors are used to identify the most important drivers in credit risk contagion across pairwise firms in enterprise group. Our findings suggest that:(1) Credit risk contagion may occur via the tail-dependence of default across subsidiary firms in an enterprise group. (2) For some periods, the significant increase in credit risk contagions across pairwise firms is observed. Moreover, these credit risk contagions present the dynamic trends over time. (3) For different pairwise firms, macro-economic and micro-economic factors play different roles on credit risk contagions in enterprise group. The most important drivers of different pairs of subsidiary firms are not the same. Our paper contributes to the recent risk literature in two respects. First, we expand on a small number of related studies by providing evidence of credit risk contagion among the subsidiary firms at an enterprise group. Second, macro-economic and micro-economic factors are incorporated into a dynamic copula model to investigate the most important drivers in credit risk contagion. In such way, the needs of regulators for risk detection tools and eventual early risk warnings are met.

Key words: credit risk contagion, tail-dependence, Joe-Clayton copula, Markov Chain Monte Carlo simulation, enterprise group