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Causal nexus between crude oil and US corporate bonds

Author

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  • Shahzad, Syed Jawad Hussain
  • Bouri, Elie
  • Hernandez, Jose Areola
  • Roubaud, David

Abstract

This study examines the Granger causal flow from implied oil volatility to US high-yield and investment-grade corporate bonds. The results show that the Granger causality differs over investment time horizons, with evidence of a more lasting effect for high-yield bonds. The oil price crash of mid-2014 intensifies the causal effect from oil price volatility to the high-yield bond market and its energy segment. Further analyses show that the US default risk and credit spread heterogeneously drive causalities from oil to high-yield and investment-grade bonds. These findings are useful to credit market participants for risk management and the design of appropriate asset allocation strategy. They are also important for policymakers regarding policy and regulatory formulations to manage the effects of volatility transmission.

Suggested Citation

  • Shahzad, Syed Jawad Hussain & Bouri, Elie & Hernandez, Jose Areola & Roubaud, David, 2021. "Causal nexus between crude oil and US corporate bonds," The Quarterly Review of Economics and Finance, Elsevier, vol. 80(C), pages 577-589.
    • Handle: RePEc:eee:quaeco:v:80:y:2021:i:c:p:577-589
    DOI: 10.1016/j.qref.2021.04.012
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    4. Elsayed, Ahmed H. & Naifar, Nader & Uddin, Gazi Salah & Wang, Gang-Jin, 2023. "Multilayer information spillover networks between oil shocks and banking sectors: Evidence from oil-rich countries," International Review of Financial Analysis, Elsevier, vol. 87(C).

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    More about this item

    Keywords

    Oil price volatility; High-yield bonds; Investment-grade bonds; Energy bond index; Frequency domain causality; Bayesian model averaging;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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