Evaluating the Impact of Oil Market Shocks on Sovereign Credit Default Swaps in Major Oil-Exporting Economies

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.