Risk spillovers in oil-related CDS, stock and credit markets

Abstract

This paper examines risk transmission and migration among six US measures of credit and market risk during the full period 2004-2011 period and the 2009-2011 recovery subperiod, with a focus on four sectors related to the highly volatile oil price. There are more long-run equilibrium risk relationships and short-run causal relationships among the four oil-related Credit Default Swaps (CDS) indexes, the (expected equity volatility) VIX index and the (swaption expected volatility) SMOVE index for the full period than for the recovery subperiod. The auto sector CDS spread is the most error-correcting in the long run and also leads in the risk discovery process in the short run. On the other hand, the CDS spread of the highly regulated, natural monopoly utility sector does not error correct. The four oil-related CDS spread indexes are responsive to VIX in the short-and long-run, while no index is sensitive to SMOVE which, in turn, unilaterally assembles risk migration from VIX. The 2007-2008 Great Recession seems to have led to "localization" and less migration of credit and market risk in the oil-related sectors.JEL: C13, C22, G1, G12, Q40.

Dynamic Spillovers between Gulf Cooperation Council’s Stocks, VIX, Oil and Gold Volatility Indices

“…The lowest DCC coefficient is recorded for Qatar below −0.3. This finding of negative correlations between oil shocks and stock returns is consistent with ex-ante expectations, and the general conclusions from the literature (see, for instance, Guesmi and Fattoum 2014;Delcoure and Singh 2018;Hammoudeh et al 2013;Maghyereh et al 2017). Figure 1B illustrates the conditional correlations between the gold market and the GCC stock markets.…”

“…Numerous past studies have contributed to the literature of volatility spillover between commodity markets and financial markets in one way or another. The majority of the studies in this discipline have focused on the volatility spillover between crude oil and key financial markets (see, inter alia, Arouri et al 2011;Guesmi and Fattoum 2014;Khalfaoui et al 2015;Delcoure and Singh 2018;Hammoudeh et al 2013;Kumar et al 2012;Sadorsky 2012). A fundamental consensus from these studies is that oil price shocks have significant time-varying impacts on the relationship between oil markets and equity markets.…”

Explaining credit default swap spreads by means of realized jumps and volatilities in the energy market

“…We do not incorporate VIX, treasury yield curve or other explanatory variables since our purpose is to focus exclusively on the relationship between CDS spreads and futures volatility and jumps (see Hammoudeh et al (2015) for a joint analysis without jumps of oil-related CDS markets along with other global financial market variables; and Arouria et al (2014) for an analysis of CDS spreads for financial sectors using several variables, one of which being the WTI crude oil futures contracts). Notice that the OVX, which is the CBOE Crude Oil Volatility Index, constitutes a more natural market-wide volatility indicator than the VIX; see Chevallier and Sévi (2013) for an analysis of the importance of variance risk premia based on OVX for predicting WTI light sweet crude oil futures.…”

The Dynamic Correlation between ASEAN-5 Stock Markets and World Oil Prices

“…The effect of oil price changes varies across different economic sectors (Arouri, Lahiani, & Nguyen, 2011). Whereas, oil has ever been viewed as a non-agricultural commodity with the highest volatility since it reached $147/barrel in July 2008 and dropped drastically to $32/barrel in March 2009 (Hammoudeh et al, 2013). Consequently, this drastically change of oil price could be a threat for the world economy (Hamma, Jarboui, & Gorbel, 2014) although the current crude oil price at the end of 2015 is stable at around $35-$45/barrel.…”