Forcing variables in the dynamics of risk spillovers in oil-related CDS sectors, equity, bond and oil markets and volatility market risks

Hammoudeh S., SARI R.

Lecture Notes in Energy, vol.54, pp.113-140, 2014 (Scopus) identifier

  • Publication Type: Article / Article
  • Volume: 54
  • Publication Date: 2014
  • Doi Number: 10.1007/978-3-642-55382-0_5
  • Journal Name: Lecture Notes in Energy
  • Journal Indexes: Scopus
  • Page Numbers: pp.113-140
  • Keywords: CDS, Oil VIX, Oil-related sectors, S&P 500 index, S&P VIX
  • Middle East Technical University Affiliated: Yes


© Springer-Verlag Berlin Heidelberg 2014.This study examines migration and cascading of credit default swaps (CDS) risks among four oil-related sectors -autos, chemical, oil and natural gas production, and utility—in two models. Model 1 encompasses fundamental variables, and Model 2 includes market risks. The key finding of the study suggests that replacing the two financial fundamental variables (the 10-year Treasury bond rate and the S&P 500 index) of Model 1 with the two market risk variables (the S&P VIX and the Oil VIX) of Model 2 reduce the long- and short-run risk migration and cascading in the second model for both the full sample and the subperiod. The CDS and VIX indices both reflect fear and risk on their own. Among the four oil-related CDS spreads, the chemical and auto spreads are the most responsive to the other credit and market risks and the fundamentals in the long-run, while those of utility and oil and natural gas sectors are not responsive. The recent quantitative easing in the United States adds to spikes in the levels of the chemical CDS and the S&P 500 index in Model 1, and to the S&P VIX and default risk spread in Model 2. Implications for model builders and policy makers are also discussed.