Summary:
This paper analyzes the determinants of credit risk in the energy sector using CDS spreads of energy corporations as well as CDS energy sectorial indexes to assess whether credit risk can be linked to the crude oil price fundamental and to other exogenous financial variables. Applying the multiple bubble methodology proposed by Phillips Shi and Yu (2015) we associate bubble behavior in CDSs with fundamentals via a series regressions applied to time changing autoregressive coefficients. Our results show that there is bubble propagation which should be closely monitored by market participants as an early signal of deteriorating market conditions.
Spanish layman's summary:
Analizamos los determinantes del riesgo del crédito en el sector energético. Utilizamos la metodología de detección de burbujas introducida por Phillips Shi and Yu (2015). Los resultados se centran en el 2014-2016 (post QE era) y muestran que existe propagación de burbujas entre los CDSs y el precio del crudo, el cual representa el colateral de la deuda.
English layman's summary:
In this paper, we analyze the determinants of credit risk in the energy sector applying the multiple bubble methodology proposed by Phillips Shi and Yu (2015). We show that there is bubble propagation between CDSs and the crude oil price which is explained by high corporate leverage under monetary tightening conditions over the 2014-2016 taper tantrum.
Keywords: CDS; CDS index; Bubble; Crude oil futures; CAPEX; Taper tantrum
JCR Impact Factor and WoS quartile: 4,800 - Q1 (2023)
DOI reference:
https://doi.org/10.1016/j.iref.2023.07.033
Published on paper: January 2024.
Published on-line: August 2023.
Citation:
I. Cervera, I. Figuerola-Ferretti Garrigues, Credit risk and bubble behavior of credit default swaps in the corporate energy sector. International Review of Economics & Finance. Vol. 89, nº. Part A, pp. 702 - 731, January 2024. [Online: August 2023]
