The impact of major oil, financial and uncertainty factors on sovereign CDS spreads : evidence from GCC, other oilexporting countries and regional markets

Abstract EN

The aim of this paper is to investigate the impact of oil price volatility and major financial and uncertainty factors on sovereign credit default swap (CDS) spreads in the case of the oil-rich Gulf Cooperation Council (GCC) countries, other oil-exporting countries and regional markets namely the G7, BRICS, Council of Europe (CE), Asia, North America (NA) and the N11 nations.

We first employ the standard quantile regression analysis that allows one to investigate the dependence dynamics of the sovereign CDS spreads under different market circumstances.

Consequently, we use the causality-in-quantiles, which allows for identifying the quantile range for which causality is relevant.

Empirical results show that the sovereign CDSs of the non GCC oil-exporting countries (i.e., Venezuela, Mexico and Russia) are the most affected by oil prices, which is more than those of major global regions/blocs.

However, the results show no or little dependence for Saudi Arabia, UAE and Norway which have the largest sovereign wealth funds.

The results also show that the sovereign CDS spreads are more sensitive to global bond market uncertainty factors than to global equity market uncertainty factors.

Finally, we find causality-in-quantiles between sovereign CDS and global financial risk and uncertainty factors and this causality relationship is different across countries and regions/blocs, particularly in the lower quantiles (i.e., bearish markets).