Spillovers between sovereign yield curve components and oil price shocks

Abstract

This paper analyzes the static and dynamic relationship between the sovereign yield curves of major oil producing and consuming countries and oil price shocks by disentangling high-frequency oil shocks (risk shocks, demand shocks and supply shocks) and the yield curve components (level, slope, and curvature). Our results show that oil demand and risk shocks and the US yield curve components are the main transmitters of shocks, whereas Japan, Korea and Brazil are the main recipients of shock spillovers. In addition, while the role of several countries is quite clear in terms of spillovers transmission, others switch roles between being transmitters and recipients of shocks. For such countries, monitoring the fluctuations in sovereign debt and oil market shocks is increasingly important to support market stability and create financial resilience to these shocks.