Examining the nexus between oil shocks and sovereign credit risk: Multidimensional insights from major oil exporters

Abstract

This paper investigates the frequency and quantile connectedness between oil market shocks and sovereign credit risk of seven major oil exporting countries: Saudi Arabia, Russia, the United Arab Emirates, Norway, the United States, Brazil, and Mexico. We apply the time-domain approach of Diebold & Yılmaz (2012), the frequency-domain approach of Baruník & Křehlík (2018), and the quantile-based connectedness approach of Ando et al. (2018). Empirical results indicate that (i) spillover effects vary significantly across different investment horizons, with Mexico, Brazil, and Saudi Arabia emerging as key transmitters of credit risk volatility, (ii) the United Arab Emirates consistently appears as a major net receiver of these risks, highlighting its vulnerability to external shocks, (iii) in both short-term and long-term horizon, demand shocks stand out as the most influential determinants of volatility in sovereign credit risks, and (iv) during periods of heightened credit risk perception, the exacerbating role of oil demand shocks becomes more pronounced..