A dynamic spillover analysis of crude oil effects on the sovereign credit risk of exporting countries

We study the dynamic spillover of crude oil prices and volatilities on sovereign risk premia of ten oil-exporting countries. Among the determining variables, we include a set of local and global factors that are identified through principal components analysis. The results indicate 4%-31% directional spillover from crude oil prices to sovereign credit default swap (CDS) spreads. Venezuela, Colombia, Russia, and Mexico are the top recipients of crude oil shocks. The local and global factors explain a relatively large portion of the spillover as well (22.50% and 17.40% maximum, respectively). Further, using the OVX volatility index as a proxy for oil price uncertainty, we find an average directional volatility spillover of 9%. The effect of political variables, and aggregate demand and supply shocks are relatively less than the oil-specific shocks.