1. The impact of major oil, financial and uncertainty factors on sovereign CDS spreads: Evidence from GCC, other oil-exporting countries and regional markets
Nader Naifar (Al Imam University, Saudi Arabia)
Syed Jawad Hussain Shahzad (Montpellier Business School, France)
Shawkat Hammoudeh (Drexel University, USA)

2. Outline of presentation
1-Motivations of the study 2- Problem statement 3- Objectives of the study 4- Presentation of sovereign CDS 5- Data description 6- Empirical methodology 7- Main empirical results 8- Conclusions and policy implications

3. Outline of presentation
1-Motivations of the study 2- Problem statement 3- Objectives of the study 4- Presentation of sovereign CDS 5- Data description 6- Empirical methodology 7- Main empirical results 8- Conclusions and policy implications

4. Motivation-I
The global financial crisis, the European sovereign debt crisis and the elevation in economic uncertainty have motivated us to investigate the dynamic co-movement between sovereign CDS spreads and major oil, financial and uncertainty factors for the GCC countries, other major oil-exporting countries and different regions/blocs.

5. Motivation-II
Economic policy uncertainty is closely related to unexpected changes in policies that may cloud the economic environment.
Our research has become relevant and timely for the oil-exporting countries, particularly in the wake of the recent collapse of oil prices which dropped from $100 in June 2014 to $26 in February This grave instability in oil prices has jolted the sovereign CDS markets, especially those of the oil-exporting countries.

6. Motivation-III
There are no in-depth empirical studies that address the impact of global financial risk and uncertainty factors on sovereign credit risk premiums for different groups of oil-sensitive countries, in comparison to the impact of the oil price collapses, reckoned under different CDS market conditions.
The lack of empirical research to detect the causal flows from the global oil market and global financial risk and uncertainty factors to the sovereign CDS spreads of the oil-rich GCC countries and other major oil-exporting countries.

7. Outline of presentation
1- Motivations of the study 2- Problem statement 3- Objectives of the study 4- Presentation of sovereign CDS 5- Data description 6- Empirical methodology 7- Main empirical results 8- Conclusions and policy implications

8. Problem statement
Is there a dependence and causality relationship between sovereign CDS spreads and global financial risk, oil and uncertainty factors, with a particular reference to oil-exporting countries?
Under which market conditions is this relationship stronger or weaker, given the fact that sovereign CDS spreads go through bullish, normal and bearish periods?
Which variable is the initiator or the leader of the causal relationship?
Which sovereign CDS spreads are the most affected by oil and global financial uncertainty?

9. Outline of presentation
1- Motivations of the study 2- Problem statement 3- Objectives of the study 4- Presentation of sovereign CDS 5- Data description 6- Empirical methodology 7- Main empirical results 8- Conclusions and policy implications

10. Objectives of the study
The main objective of this study is to investigate how major oil prices, global uncertainty in bond markets and global financial factors shape the CDS spreads’ distributions in the GCC (namely Bahrain, Qatar, Saudi Arabia and United Arab Emirates (UAE)), other major oil-exporting countries (namely Mexico, Nigeria, Norway, Russia and Venezuela) and regional markets as well as those of the G7, BRICS, Council of Europe, Asia and N11 nations.
To discern which countries, regions or blocs are the most sensitive to the global financial factors and oil prices under different CDS market conditions (bullish, normal and bearish periods). These countries and regions/blocs are different in terms of their relative dependency on oil revenues, amounts of foreign reserves, levels of sovereign wealth funds and sensitivity to uncertainty. .

11. Outline of presentation
1- Motivations of the study 2- Problem statement 3- Objectives of the study 4- Presentation of sovereign CDS 5- Data description 6- Empirical methodology 7- Main empirical results 8- Conclusions and policy implications

12. Description of sovereign CDS’s
Sovereign CDSs are bilateral contracts between a buyer and a seller where the seller is offering protection against credit events that may affect a sovereign borrower.
The main difference between a sovereign CDS and a corporate CDS, from the contractual point view of the International Swaps and Derivatives Association (ISDA), is the definition of what constitutes a “credit event”. For a corporate CDS, a credit event is either a bankruptcy, a failure-to-pay or, if covered, a restructuring. For Western European sovereigns, bankruptcy is replaced with a moratorium/repudiation.  

13. Outline of presentation
1- Motivations of the study 2- Problem statement 3- Objectives of the study 4- Presentation of sukuk 5- Data description 6- Empirical methodology 7- Main empirical results 8- Conclusions and policy implications

14. weekly time series for the 5-year sovereign CDS spread indices
Data description-I
Sovereign CDS Data
weekly time series for the 5-year sovereign CDS spread indices
For GCC countries (Bahrain, Qatar, Saudi Arabia, UAE)
Other major oil-exporting countries (Mexico, Brazil, Norway, Russia and Venezuela).
For regional and bloc markets namely the G7, BRICS, Council of Europe, Asia , North America and N11(the next 11) regions/nations
June, 2016
January, 2009

15. Data description-I
Sovereign CDS Data

16. Financial uncertainties Data Commodity uncertainties Data
Data description-II
Financial uncertainties Data
VIX index
The Chicago Board Options Exchange (CBOE) Volatility Index for the stock market.
MOVE index
The Merrill Lynch Option Volatility Estimate index MOVE (the bond market's equivalent to VIX).
Treasury bond
The US 10-year Treasury bond interest rate (US bond).
Commodity uncertainties Data
OVX index
The CBOE crude oil volatility index.

17. Outline of presentation
1- Motivations of the study 2- Problem statement 3- Objectives of the study 4- Presentation of sukuk 5- Data description 6- Empirical methodology 7- Main empirical results 8- Conclusions and policy implications

18. Empirical methodology
First, we use the quantile regression approach to account for the relationship between the sovereign CDS index dynamics and major oil and financial risk and uncertainty factors:
𝑄 𝜏 𝑦 𝑡 = 𝛿 0,𝜏 + 𝛿 1,𝜏 ′ 𝑍 𝑡
The quantile regression coefficient
oil and financial uncertainty variables
The effects of a constant on sukuk quantiles

19. Empirical methodology
Second, we use the causality in quantiles approach which allows one to identify the quantile range for which causality is relevant. This approach detects nonlinear causalities during alternative CDS market states that can be characterized by normal, upward and downturn markets.
We follow Jeong et al. (2012) where the quantile-based causality is defined as follows: 𝑥 𝑡 does not cause 𝑦𝑡 in the 𝜃 quantile with respect to the lag-vector of
𝑦 𝑡−1 ,…, 𝑦 𝑡−𝑝 , 𝑥 𝑡−1 ,…, 𝑥 𝑡−𝑝 if:
𝑄 𝜃 𝑦 𝑡, 𝑦 𝑡−1 ,…, 𝑦 𝑡−𝑝 , 𝑥 𝑡−1 ,…, 𝑥 𝑡−𝑝 = 𝑄 𝜃 𝑦 𝑡, 𝑦 𝑡−1 ,…, 𝑦 𝑡−𝑝
𝑄 𝜃 𝑦 𝑡 is the 𝜃-th quantile of 𝑦 𝑡 depending on t and 0<𝜃<1.

20. Outline of presentation
1- Motivations of the study 2- Problem statement 3- Objectives of the study 4- Presentation of sukuk 5- Data description 6- Empirical methodology 7- Main empirical results 8- Conclusions and policy implications

21. Main empirical results-A
Quantile regression results
We find that the non GCC major exporters Venezuela, Mexico and Russia are the most countries affected by oil prices across all quantiles.
This result must be conditioned on the possession of large foreign assets. A dwindling in the size of those assets should have different implications for the spreads of their CDSs during bearish markets.

22. Main empirical results-B
Quantile regression results
However, no dependence (or just weak dependence that is limited in a few quantiles) is observed between oil market returns and volatility and sovereign CDS spreads in the case of Saudi Arabia, UAE and Norway, although these countries are considered as major players in the global oil market.
This finding can be explained by the fact that these countries have huge sovereign wealth funds which cushion them from global negative shocks, and therefore their sovereign CDS spreads are less affected by the volatility of oil prices.

23. Main empirical results-C
Causality-in-quantile results
The oil price returns and oil volatility Granger-cause the sovereign CDS spreads mostly in the lower and/or middle quantiles for most of the oil- exporting countries, with higher significance in the lower quantiles.
This finding implies that oil prices have more influence in the case of bearish CDS markets.

24. Main empirical results-D
Causality-in-quantile results: Sovereign CDS-Oil prices
Note: These figures plot the test statistics (vertical axis) for the causality-in-quantiles. The quantiles are on the horizontal axis. The red line (dashed blue line) indicates the test statistic for causality from oil to CDS (CDS to oil). The horizontal thin solid and the thin two-dashed lines represent the 5% and 10% critical values (CV), respectively.

25. Main empirical results-C
Causality-in-quantile results
We also find significant episodes of Granger-causality from the equity VIX and the bond MOVE indexes to the sovereign CDS spreads of the major oil-exporting countries and the regional/blocks.
This finding implies that the global bond and stock uncertainty provide useful information for predicting sovereign CDS spreads.

26. Main empirical results-D
Causality-in-quantile results: Sovereign CDS-VIX index
Note: These figures plot the test statistics (vertical axis) for the causality-in-quantiles. The quantiles are on the horizontal axis. The red line (dashed blue line) indicates the test statistic for causality from oil to CDS (CDS to oil). The horizontal thin solid and the thin two-dashed lines represent the 5% and 10% critical values (CV), respectively.

27. Main empirical results-C
Causality-in-quantile results
We also find little evidence of reverse Granger causality from sovereign CDS to VIX and no evidence of Granger causality from sovereign CDS to MOVE.
This finding implies the presence of a unidirectional relationship. This suggests that the CDSs get their clues from the stock and bond markets but not the other way around..

28. Main empirical results-D
Causality-in-quantile results: Sovereign CDS-MOVE index
Note: These figures plot the test statistics (vertical axis) for the causality-in-quantiles. The quantiles are on the horizontal axis. The red line (dashed blue line) indicates the test statistic for causality from oil to CDS (CDS to oil). The horizontal thin solid and the thin two-dashed lines represent the 5% and 10% critical values (CV), respectively.

29. Outline of presentation
1- Motivations of the study 2- Problem statement 3- Objectives of the study 4- Presentation of sukuk 5- Data description 6- Empirical methodology 7- Main empirical results 8- Conclusions and policy implications

30. Conclusions and policy implications-I
In this study, we investigated how major oil prices, global uncertainty in bond markets and global financial factors shape the CDS spreads’ distributions in the case of GCC, other oil-exporting countries and regional markets.
We find different dependence structures and causality relationships between sovereign CDS premiums and the global financial risk and uncertainty factors across quantiles as well as countries, regions and blocs.

31. Conclusions and policy implications-II
The increase in the credit risk premiums as a result of a higher oil price volatility or a financial uncertainty has implications for the capital-borrowing costs, the values of currencies, financial spreads … etc.
The rise of sovereign credit risk premiums affects banks’ stands and funding conditions, and also impacts the level and volatility of sovereign bond yields, mainly in the term of maturity, and thereby influences the sovereign liquidity risk.
Policy makers and sovereign debt managers in oil-exporting countries should be cognizant of our empirical results and should seek to minimize the medium- to long-term expected costs of funding government activities, particularly when oil volatility and financial uncertainty follow a rising trend, and prepare for the days when their foreign assets dwindle.