Evaluating the Impact of Oil Market Shocks on Sovereign Credit Default Swaps in Major Oil-Exporting Economies
Received: 8 September 2024 | Revised: 29 September 2024 | Accepted: 5 October 2024 | Online: 11 October 2024
Corresponding author: Nadia Belkhir
Abstract
This study analyzes the impact of oil market fluctuations on Sovereign Credit Default Swaps (SCDS) in three key oil-exporting economies: Saudi Arabia, Russia, and the United Arab Emirates (UAE). The study investigates how various oil shocks, namely demand, supply, and market risk, affect sovereign credit risk and how these effects are transmitted within and across these economies. Time-domain and frequency-domain analyses were used to categorize oil market shocks and structural break analysis was incorporated to account for significant global events. The findings indicate that Saudi Arabia is a primary source of credit risk volatility, influencing Russia and the UAE, with the latter being significantly affected as a net recipient of such risks. Structural breaks, such as those associated with the COVID-19 pandemic, introduce shifts in impact patterns. This study underscores the significant role of demand shocks in shaping sovereign credit risk across the countries examined. These insights are essential for policymakers, investors, and financial analysts focused on sovereign credit risk management in oil-exporting economies, highlighting the importance of considering structural changes in economic conditions.
Keywords:
oil market shocks, sovereign credit risk, frequency connectedness, sovereign credit default swapsDownloads
References
H. Blommestein, S. Eijffinger, and Z. Qian, "Regime-dependent determinants of Euro area sovereign CDS spreads," Journal of Financial Stability, vol. 22, pp. 10–21, Feb. 2016.
G. Huyugüzel Kışla and A. Özlem Önder, "Spatial analysis of sovereign risks: The case of emerging markets," Finance Research Letters, vol. 26, pp. 47–55, Sep. 2018.
N. Naifar, S. J. H. Shahzad, and S. Hammoudeh, "Dynamic nonlinear impacts of oil price returns and financial uncertainties on credit risks of oil-exporting countries," Energy Economics, vol. 88, May 2020, Art. no. 104747.
J. Wang, X. Sun, and J. Li, "How do sovereign credit default swap spreads behave under extreme oil price movements? Evidence from G7 and BRICS countries," Finance Research Letters, vol. 34, May 2020, Art. no. 101350.
C. C. Lee, C. C. Lee, and S. L. Ning, "Dynamic relationship of oil price shocks and country risks," Energy Economics, vol. 66, pp. 571–581, Aug. 2017.
A. Sensoy, F. J. Fabozzi, and V. Eraslan, "Predictability dynamics of emerging sovereign CDS markets," Economics Letters, vol. 161, pp. 5–9, Dec. 2017.
L. Kilian and C. Park, "The Impact of Oil Price Shocks on the U.S. Stock Market," International Economic Review, vol. 50, no. 4, pp. 1267–1287, 2009.
I. Pavlova, M. E. de Boyrie, and A. M. Parhizgari, "A dynamic spillover analysis of crude oil effects on the sovereign credit risk of exporting countries," The Quarterly Review of Economics and Finance, vol. 68, pp. 10–22, May 2018.
Y. H. Huang, C. C. Chen, and C. H. Shen, "Dynamics of sovereign credit contagion," Journal of Derivatives, vol. 22, no. 1, pp. 27–45, Sep. 2014.
R. Arezki and M. Brückner, "Commodity Windfalls, Democracy and External Debt," The Economic Journal, vol. 122, no. 561, pp. 848–866, Jun. 2012.
J. Aizenman, Y. Jinjarak, and D. Park, "Fundamentals and Sovereign Risk of Emerging Markets," Pacific Economic Review, vol. 21, no. 2, pp. 151–177, 2016.
E. Bouri, S. J. H. Shahzad, N. Raza, and D. Roubaud, "Oil volatility and sovereign risk of BRICS," Energy Economics, vol. 70, pp. 258–269, Feb. 2018.
M. Cheuathonghua, M. E. de Boyrie, I. Pavlova, and J. Wongkantarakorn, "Extreme risk spillovers from commodity indexes to sovereign CDS spreads of commodity dependent countries: A VAR quantile analysis," International Review of Financial Analysis, vol. 80, Mar. 2022, Art. no. 102033.
Z. Dai and R. Tang, "The impact of oil price shocks on systematic risk of G7 stock markets," Expert Systems with Applications, vol. 248, Aug. 2024, Art. no. 123408.
S. A. Ziadat, W. Mensi, and S. H. Kang, "Frequency spillovers between oil shocks and stock markets of top oil-producing and -consuming economies," Energy, vol. 291, Mar. 2024, Art. no. 130239.
Z. Umar, S. Hadhri, E. J. A. Abakah, M. Usman, and M. Umar, "Return and volatility spillovers among oil price shocks and international green bond markets," Research in International Business and Finance, vol. 69, Apr. 2024, Art. no. 102254.
M. U. Rehman, I. D. Raheem, R. Zeitun, X. V. Vo, and N. Ahmad, "Do oil shocks affect the green bond market?," Energy Economics, vol. 117, Jan. 2023, Art. no. 106429.
Z. He and H. Sun, "The time-varying and asymmetric impacts of oil price shocks on geopolitical risk," International Review of Economics & Finance, vol. 91, pp. 942–957, Mar. 2024.
Y.-S. Ren, T. Klein, Y. Jiang, C.-Q. Ma, and X.-G. Yang, "Dynamic spillovers among global oil shocks, economic policy uncertainty, and inflation expectation uncertainty under extreme shocks," Journal of International Financial Markets, Institutions and Money, vol. 91, Mar. 2024, Art. no. 101951.
P. Vatsa and J. Baek, "Asymmetric influence of oil demand and supply shocks on meat commodities," Energy Economics, vol. 128, Dec. 2023, Art. no. 107175.
Y. Wei, F. Qiu, H. An, X. Zhang, C. Li, and X. Guo, "Exogenous oil supply shocks and global agricultural commodity prices: The role of biofuels," International Review of Economics & Finance, vol. 92, pp. 394–414, Apr. 2024.
S. A. M. Alturki and A. M. Hibbert, "The Impact of Oil Shocks on Sovereign Default Risk," The World Bank, Policy Research Working Paper 9546, Feb. 2021.
S. J. H. Shahzad, N. Naifar, S. Hammoudeh, and D. Roubaud, "Directional predictability from oil market uncertainty to sovereign credit spreads of oil-exporting countries: Evidence from rolling windows and crossquantilogram analysis," Energy Economics, vol. 68, pp. 327–339, Oct. 2017.
E. Bouri and S. J. H. Shahzad, "Network Topology of Dynamic Credit Default Swap Curves of Energy Firms and the Role of Oil Shocks," The Energy Journal, vol. 43, no. 1_suppl, pp. 1–26, Jun. 2022.
M. A. Nasir, A. A. Al-Emadi, M. Shahbaz, and S. Hammoudeh, "Importance of oil shocks and the GCC macroeconomy: A structural VAR analysis," Resources Policy, vol. 61, pp. 166–179, Jun. 2019.
M. Stolbov, "Determinants of sovereign credit risk: the case of Russia," Post-Communist Economies, vol. 29, no. 1, pp. 51–70, Jan. 2017.
L. Kilian, "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," American Economic Review, vol. 99, no. 3, pp. 1053–1069, Jun. 2009.
R. C. Ready, "Oil Prices and the Stock Market*," Review of Finance, vol. 22, no. 1, pp. 155–176, Feb. 2018.
A. H. Elsayed, N. Naifar, G. S. Uddin, and G. J. Wang, "Multilayer information spillover networks between oil shocks and banking sectors: Evidence from oil-rich countries," International Review of Financial Analysis, vol. 87, May 2023, Art. no. 102602.
F. X. Diebold and K. Yilmaz, "Better to give than to receive: Predictive directional measurement of volatility spillovers," International Journal of Forecasting, vol. 28, no. 1, pp. 57–66, Jan. 2012.
"The Atlas of Economic Complexity," Harvard Growth Lab. https://atlas.cid.harvard.edu/explore?country=undefined&product=910&year=2019&productClass=HS&target=Product&partner=undefined&startYear=1995.
M. Balcilar, A. H. Elsayed, and S. Hammoudeh, "Financial connectedness and risk transmission among MENA countries: Evidence from connectedness network and clustering analysis1," Journal of International Financial Markets, Institutions and Money, vol. 82, Jan. 2023, Art. no. 101656.
J. Baruník and T. Křehlík, "Measuring the Frequency Dynamics of Financial Connectedness and Systemic Risk*," Journal of Financial Econometrics, vol. 16, no. 2, pp. 271–296, Mar. 2018.
Downloads
How to Cite
License
Copyright (c) 2024 Nedia Belkhir, Mohammed Alhashim, Nader Naifar
This work is licensed under a Creative Commons Attribution 4.0 International License.
Authors who publish with this journal agree to the following terms:
- Authors retain the copyright and grant the journal the right of first publication with the work simultaneously licensed under a Creative Commons Attribution License that allows others to share the work with an acknowledgement of the work's authorship and initial publication in this journal.
- Authors are able to enter into separate, additional contractual arrangements for the non-exclusive distribution of the journal's published version of the work (e.g., post it to an institutional repository or publish it in a book), with an acknowledgement of its initial publication in this journal.
- Authors are permitted and encouraged to post their work online (e.g., in institutional repositories or on their website) after its publication in ETASR with an acknowledgement of its initial publication in this journal.
