Dependence Structures Between Sovereign Credit Default Swaps and Global Risk Factors in Brics Countries

This study examined the tail dependency structure of sovereign credit risk and three global risk factors in BRICS countries using copulas approach, which is known for its ability to provide the “true” tail correlation based on the correct marginal distribution. The empirical results show that global market risk sentiment comoves with sovereign CDS spreads across BRICS countries under extreme market events, with Brazil having the highest co-dependency followed by China, Russia, and South Africa. Furthermore, oil price volatility is the second biggest risk factor correlated with sovereign CDS spreads for Brazil and South Africa while exchange rate risk exhibits very small co-dependence with sovereign CDS spreads under extreme market conditions dominated by tail events. On the contrary, exchange rate risk is the second largest risk factor co-moving with China and Russia’s sovereign CDS spreads while oil price volatility exhibits the lowest co-dependence to CDS in these countries. Between oil price and currency risk, evidence of single risk factor dominance is found for Russia where exchange rate risk is largely dominant. These results suggest that BRICS policymakers might consider financial sector regulations that mitigate risks spill-over such as targeted capital controls when markets are distressed.

COVID-19 and the Energy Price Volatility

The challenges of the world economy and their societies, after the outbreak of the COVID-19 pandemic have led policy-makers to seek for effective solutions. This paper examines the oil price volatility response to the COVID-19 pandemic and stock market volatility using daily data. A general econometric panel model is applied to investigate the relationship between COVID-19 infection and death announcements with oil price volatility. The paper uses data from six geographical zones, Europe, Africa, Asia, North America, South America, and Oceania for the period 21 January 2020 until 13 May 2021 and the empirical findings show that COVID-19 deaths affected oil volatility significantly. This conclusion is confirmed by a second stage analysis applied separately for each geographical area. The only geographical area where the existence of correlation is not confirmed between the rate of increase in deaths and the volatility of the price of crude oil is Asia. The conclusions of this study clearly suggest that COVID-19 is a new risk component on top of economic and market uncertainty that affects oil prices and volatility. Overall, our results are useful for policy-makers, especially in the case of a new wave of infection and deaths in the future.