Oil volatility and sovereign risk of BRICS

We study the dependence between oil implied volatility shocks and BRICS sovereign risk from July 2009 to March 2017. First, we examine spillovers in value at risk using multivariate regression quantiles and reveal that oil volatility represents a common risk for oil-exporting and oil-importing BRICS countries. We also employ a quantile impulse-response function and reveal the presence of an asymmetry in the mechanisms of shock transmissions between oil exporters (Russia and Brazil) and oil importers (China and India): the former are more sensitive to positive oil shocks, whereas the latter are more sensitive to negative oil shocks. Second, we measure the directional predictability in the quantiles using the bivariate cross-quantilogram approach and show that in most cases, a low- (high-) volatility of oil market predicts low (high) sovereign risk at various quantiles and lags. Policy implications are discussed.