What Explains the Sovereign Credit Default Swap Spreads Changes in the GCC Region?

Abstract

This paper aimed to investigate the drivers of sovereign credit risk spreads changes in the case of four Gulf Cooperation Council (GCC) countries, namely Kingdom of Saudi Arabia (KSA), the United Arab Emirates (UAE), Qatar, and Bahrain. Specifically, we explained the changes in sovereign credit default swap (hereafter SCDS) spreads at different locations of the spread distributions by three categories of explanatory variables: global uncertainty factors, local financial variables, and global financial market variables. Using weekly data from 5 April 2013, to 17 January 2020, and the quantile regression model, empirical results indicate that the global factors outperform the local factors. The most significant variables for all SCDS spreads are the global financial uncertainty embedded in the Chicago Board Options Exchange (CBOE) volatility index (VIX) and the global conventional bond market uncertainty embedded in the Merrill Lynch Option Volatility Estimate (MOVE) index. Moreover, the MOVE index affects the various SCDS spreads only when the CDS markets are bullish. Interestingly, the SCDS spreads are not affected by the global economic policy and the gold market uncertainties. Additionally, a weak dependence is observed between oil prices and SCDS spreads. For the country-specific factors, stock market returns are the most significant variable and impact the SCDS spreads at different market circumstances.

Yatırımcı Duyarlılığı ile ABD Geleneksel ve Yeşil Tahvil Piyasaları Arasındaki Bağlantılılık Analizi

“…(2014) Dow Jones İslami piyasa endeksinin ABD ekonomik politika belirsizlik endeksi ile çift yönlü nedensellik ilişki içerisinde olduğu ve bu değişkenin piyasaları öngörücü bir içeriğe sahip olduğunu tespit etmişlerdir. VIX korku endeksi ile finansal piyasalar arasındaki ilişkiyi inceleyen çalışmalar (Economou vd., 2018;Öner vd., 2018;Li vd., 2020;Zghal ve Ghorbel, 2020;Naifar, 2020, Gökgöz ve Kayahan, 2023 sonucunda ise endeksin piyasalarla ilişkili olduğu ve piyasaları tahmin etmedeki gücünün önemli olduğu vurgulanmıştır. Yatırımcılar, politika yapıcılar tarafından yeşil finansın öneminin artması ile yeşil tahvil piyasasına ilgi her geçen gün artmaktadır.…”

Does Geopolitical Risk Matter for Sovereign Credit Risk? Fresh Evidence from Nonlinear Analysis

“…He finds that global equity uncertainty affects the dynamics of SCDSs before and during the COVID-19 pandemic. Naifar (2020) investigated the drivers of SCDS spread changes in the case of Gulf Cooperation Council countries. Empirical results show that global financial uncertainty (VIX index) and the global conventional bond market uncertainty (MOVE index) are the main drivers of SCDS variations.…”

“…Sovereign credit risk has gained importance due to its significance to policymakers, countries' ability to borrow, and investors who wish to diversify their portfolios internationally. Most of the existing studies focus argues the importance of global macroeconomics and risk factors in explaining the changes in SCDS spreads (e.g., Pan and Singleton (2008); Hilscher and Nosbusch (2010); Longstaff et al (2011); Oliveira et al (2012); Amstad et al (2016); Stolbov (2017); Bouri et al (2018); Naifar (2020); Rikhotso and Simo-Kengne (2022); among others). In addition, the recent increase in sovereign credit default swaps of many countries caused by Russia's invasion of Ukraine motivated us to investigate the impact of geopolitical risk on sovereign credit risk.…”

Analysis of The Relationship Between Credit Default Swaps and Macroeconomic Variables

“…Kredi riski artması durumunda CDS primleri yükselmekte, tersi durumda ise CDS primleri düşmektedir. Bu bağlamda, ülkelere ait CDS primleri, ülke kredi riskini dengelemek için yararlı bir riskten korunma aracı sağlayabilmekte ve finansal istikrarı iyileştirebilmektedir (Naifar, 2020).…”