Systemwide directional connectedness from Crude Oil to sovereign credit risk

Vimmy Bajaj, Pawan Kumar and Vipul Kumar Singh

Journal of Commodity Markets, 2023, vol. 30, issue C

Abstract: This study examines the spillovers from Crude Oil price fluctuations to sovereign credit risk, proxied by CDS spreads for 16 oil exporters and importers belonging to G20. Besides measuring shocks from Crude Oil to sovereign risk, it also examined the system-wide impacts of CDS shocks to understand their magnified impacts within a system. Furthermore, the study finds the channels that have the potential to act as a carrier of shocks from Crude Oil to sovereign risk considering four country-specific and two global factors. Our study deployed Generalized Impulse Response Functions and Generalized Forecast Error Variance Decomposition for being independent of ordering. Additionally, DCC-GARCH has been applied to test the robustness of the results. Our results highlight higher spillovers to oil-exporting countries from Crude Oil when compared to oil importers, irrespective of their development stage. Interestingly, developed countries are severely impacted by net system-wide shocks from developing and oil-exporting countries. Moreover, Global factors play a dominant role in carrying the shocks from Crude Oil to sovereign risk of countries. Stock market indices are important among important domestic factors that act as carriers of shocks, and VIX is robust amongst global variables. Our results are valuable to Regulators, policymakers, portfolio managers, banks, and financial institutions for proactively planning their respective policies.

Keywords: CDS spreads; Crude oil; GFEVD; Sovereign risk (search for similar items in EconPapers)
JEL-codes: F36 H63 O57 Q43 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jocoma:v:30:y:2023:i:c:s2405851322000290

DOI: 10.1016/j.jcomm.2022.100272

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