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Credit risk and bubble behavior of credit default swaps in the corporate energy sector

Author

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  • Cervera, Ignacio
  • Figuerola-Ferretti, Isabel

Abstract

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.

Suggested Citation

  • Cervera, Ignacio & Figuerola-Ferretti, Isabel, 2024. "Credit risk and bubble behavior of credit default swaps in the corporate energy sector," International Review of Economics & Finance, Elsevier, vol. 89(PA), pages 702-731.
    • Handle: RePEc:eee:reveco:v:89:y:2024:i:pa:p:702-731
    DOI: 10.1016/j.iref.2023.07.033
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    More about this item

    Keywords

    CDS; CDS index; Bubble; Crude oil futures; CAPEX; Taper tantrum;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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