# The Effect of Jumps in the Crude Oil Market on the Sovereign Risks of Major Oil Exporters

## Abstract

**:**

## 1. Introduction

## 2. Research Background

## 3. Data Description

## 4. Methodology

#### 4.1. Testing for Jumps

_{t}) be a random return described by an AR(1)-GJR-GARCH(1,1) model such as:

_{+}

_{1}(${\sigma}_{t+1}^{2})$ is not affected by ${a}_{t}{I}_{t}$ (Laurent et al. 2016).

_{T,λ}is the critical value. In the case of the rejection of the null hypothesis, Laurent et al. (2016) propose the following binary variable:

#### 4.2. Studying the Effect of Oil Price/Volatility Jumps on the Jumps in Sovereign CDS Spreads

_{t}) tracks the logistic regression.

## 5. Results and Discussion

#### 5.1. Results for Jumps

#### 5.2. Results of the Effect of Oil Price/Volatility Jumps on the Jumps in Sovereign CDS Spreads

## 6. Concluding Remarks

## Funding

## Conflicts of Interest

## Appendix A

**Figure A1.**Plots of level series of sovereign CDS spreads, crude oil prices, and oil implied volatility.

**Figure A2.**Jumps in the series of changes in sovereign CDS spreads, returns of crude oil, and changes in oil implied volatility.

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1 | Empirical evidence suggests that lower oil prices can shape energy export revenues, government expenditure, and fiscal balances of oil dependent economies (see, among others, El Anshasy and Bradley 2012). |

2 | The choice of these five countries and two emirates is determined by the availability of sovereign CDS data. Unfortunately, the daily CDS spreads of Saudi Arabia and Qatar are very illiquid. |

3 | Since both CDS spreads and oil implied volatility are measured in percentage points or basis points, taking ‘ordinary’ first differences should be sufficient. |

4 | This test is quite similar to the non-parametric tests of Lee and Mykland (2008). |

5 | Our estimated results are not sensitive to the choice between the AR-GJR-GARCH and AR-GARCH models. |

6 | The lack of relationships between the price discontinuities of crude oil prices and CDS spreads of major oil exporters allows us to give some insights about diversifying the risk of jumps between the two variables. In fact, evidence that jumps of crude oil prices and CDS spreads are unrelated represent good news to investors who may use crude oil prices as a diversifier of the jump risk of sovereign CDS spreads. |

Mean | Max. | Min. | Std. Dev. | Skewness | Kurtosis | Jarque−Bera | ADF | ARCH−LM | |
---|---|---|---|---|---|---|---|---|---|

Russia | −0.2498 | 53.5100 | −97.2901 | 7.4111 | −1.0608 | 23.6017 | 39,461.4400 * | −34.3647 * | 40.5793 * |

Brazil | −0.1832 | 50.7300 | −87.6445 | 6.5425 | −0.8794 | 24.0722 | 41,136.0600 * | −23.4194 * | 46.0921 * |

South Africa | −0.1183 | 23.6900 | −29.6400 | 5.0663 | −0.1866 | 6.2264 | 970.5268 * | −43.0916 * | 16.1933 * |

Abu Dhabi | −0.0639 | 9.3220 | −9.9340 | 1.0682 | −0.3654 | 20.8106 | 29,233.0500 * | −13.2021 * | 25.9077 * |

Dubai | −0.1707 | 34.7021 | −29.3401 | 3.1042 | −0.5036 | 29.8879 | 66,605.3700 * | −28.5041 * | 29.7821 * |

Kazakhstan | −0.1471 | 30.1299 | −39.6802 | 4.5298 | −0.3234 | 15.7128 | 14,907.1200 * | −28.5323 * | 37.1288 * |

Mexico | −0.0742 | 18.1580 | −24.4300 | 3.6999 | −0.0779 | 6.6018 | 1195.7460 * | −44.4872 * | 30.7181 * |

OVX | −0.1852 | 22.9802 | −18.1006 | 4.0862 | 0.2113 | 4.6277 | 260.1770 * | −47.3986 * | 22.0334 * |

Crude oil | −0.0171 | 9.8968 | −8.2373 | 1.9198 | 0.2071 | 5.9391 | 748.3891 * | −43.9739 * | 17.2372 * |

Russia | Brazil | South Africa | Abu Dhabi | Dubai | Kazakhstan | Mexico | OVX | |
---|---|---|---|---|---|---|---|---|

Russia | 1 | |||||||

Brazil | 0.3606 | 1 | ||||||

South Africa | 0.5240 | 0.5101 | 1 | |||||

Abu Dhabi | 0.2777 | 0.2084 | 0.4211 | 1 | ||||

Dubai | 0.3369 | 0.1940 | 0.3852 | 0.5861 | 1 | |||

Kazakhstan | 0.5016 | 0.2894 | 0.5120 | 0.4449 | 0.5252 | 1 | ||

Mexico | 0.4349 | 0.7462 | 0.5874 | 0.3118 | 0.3183 | 0.4146 | 1 | |

OVX | 0.1854 | 0.2268 | 0.2472 | 0.1430 | 0.1468 | 0.1986 | 0.3027 | 1 |

Crude oil | −0.0893 | 0.0083 | −0.0257 | −0.1009 | −0.0849 | −0.0933 | −0.0093 | 0.0464 |

Russia | Brazil | South Africa | Abu Dhabi | Dubai | Kazakhstan | Mexico | OVX | Crude Oil | ||
---|---|---|---|---|---|---|---|---|---|---|

Panel A: Number of jumps | Sum | |||||||||

2011 | 3 | 2 | 2 | 12 | 9 | 4 | 4 | 8 | 2 | 46 |

2012 | 5 | 4 | 3 | 21 | 17 | 3 | 1 | 1 | 0 | 55 |

2013 | 7 | 7 | 7 | 17 | 36 | 4 | 4 | 5 | 0 | 87 |

2014 | 9 | 1 | 1 | 19 | 34 | 10 | 3 | 4 | 3 | 84 |

2015 | 8 | 2 | 2 | 33 | 37 | 11 | 0 | 3 | 2 | 98 |

2016 | 2 | 6 | 5 | 26 | 27 | 5 | 4 | 2 | 1 | 78 |

2017 | 3 | 4 | 3 | 25 | 32 | 11 | 1 | 2 | 2 | 83 |

2018 | 4 | 2 | 3 | 14 | 23 | 19 | 6 | 2 | 4 | 77 |

2019 | 2 | 4 | 3 | 11 | 3 | 7 | 3 | 2 | 4 | 39 |

Sum | 43 | 32 | 29 | 178 | 218 | 74 | 26 | 29 | 18 | 647 |

Panel B: % of days with jumps | ||||||||||

2011 | 0.14% | 0.09% | 0.09% | 0.54% | 0.41% | 0.18% | 0.18% | 0.36% | 0.09% | |

2012 | 0.23% | 0.18% | 0.14% | 0.95% | 0.77% | 0.14% | 0.05% | 0.05% | 0.00% | |

2013 | 0.32% | 0.32% | 0.32% | 0.77% | 1.63% | 0.18% | 0.18% | 0.23% | 0.00% | |

2014 | 0.41% | 0.05% | 0.05% | 0.86% | 1.54% | 0.45% | 0.14% | 0.18% | 0.14% | |

2015 | 0.36% | 0.09% | 0.09% | 1.49% | 1.68% | 0.50% | 0.00% | 0.14% | 0.09% | |

2016 | 0.09% | 0.27% | 0.23% | 1.18% | 1.22% | 0.23% | 0.18% | 0.09% | 0.05% | |

2017 | 0.14% | 0.18% | 0.14% | 1.13% | 1.45% | 0.50% | 0.05% | 0.09% | 0.09% | |

2018 | 0.18% | 0.09% | 0.14% | 0.63% | 1.04% | 0.86% | 0.27% | 0.09% | 0.18% | |

2019 | 0.09% | 0.18% | 0.14% | 0.50% | 0.14% | 0.32% | 0.14% | 0.09% | 0.18% | |

Total % | 1.95% | 1.45% | 1.31% | 8.06% | 9.87% | 3.35% | 1.18% | 1.31% | 0.82% |

Russia | Brazil | South Africa | Abu Dhabi | Dubai | Kazakhstan | Mexico | OVX | |
---|---|---|---|---|---|---|---|---|

Russia | 1 | |||||||

Brazil | 0.3432 | 1 | ||||||

South Africa | 0.5300 | 0.4663 | 1 | |||||

Abu Dhabi | 0.2807 | 0.1690 | 0.3399 | 1 | ||||

Dubai | 0.2907 | 0.1417 | 0.3008 | 0.5107 | 1 | |||

Kazakhstan | 0.5011 | 0.2760 | 0.4757 | 0.3986 | 0.4113 | 1 | ||

Mexico | 0.4237 | 0.7293 | 0.5312 | 0.2371 | 0.2280 | 0.3397 | 1 | |

OVX | 0.1281 | 0.1798 | 0.1977 | 0.0916 | 0.0705 | 0.1170 | 0.2215 | 1 |

Crude oil | −0.0773 | 0.0075 | −0.0232 | −0.0989 | −0.0808 | −0.0871 | −0.0032 | 0.0327 |

**Table 5.**Analysis of the effect of oil price/volatility jumps on the jumps in credit default swap (CDS) spreads.

Jumps-Oil Price at Time t−1 | Jumps-OVX at Time t−1 | |
---|---|---|

Jumps-Russia | −0.7823 | 1.2189 *** |

Jumps-Brazil | −0.3288 | 0.8072 ** |

Jumps-South Africa | −0.1293 | 0.6879 ** |

Jumps-Abu Dhabi | −0.4193 | 0.8410 ** |

Jumps-Dubai | −0.1872 | 0.3932 |

Jumps-Kazakhstan | 0.4321 | 1.1297 ** |

Jumps-Mexico | 0.6803 | 1.0817 ** |

© 2019 by the author. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (http://creativecommons.org/licenses/by/4.0/).

## Share and Cite

**MDPI and ACS Style**

Bouri, E.
The Effect of Jumps in the Crude Oil Market on the Sovereign Risks of Major Oil Exporters. *Risks* **2019**, *7*, 118.
https://doi.org/10.3390/risks7040118

**AMA Style**

Bouri E.
The Effect of Jumps in the Crude Oil Market on the Sovereign Risks of Major Oil Exporters. *Risks*. 2019; 7(4):118.
https://doi.org/10.3390/risks7040118

**Chicago/Turabian Style**

Bouri, Elie.
2019. "The Effect of Jumps in the Crude Oil Market on the Sovereign Risks of Major Oil Exporters" *Risks* 7, no. 4: 118.
https://doi.org/10.3390/risks7040118