Oil Price Shocks and Bond Risk Premia: Evidence from a Panel of 15 Countries

Leonardo Iania, Marco Lyrio and Liana Nersisyan
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Liana Nersisyan: Université catholique de Louvain, LIDAM/LFIN, Belgium

No 2023002, LIDAM Discussion Papers LFIN from Université catholique de Louvain, Louvain Finance (LFIN)

Abstract: We study the effect of oil price shocks on bond risk premia. Based on Baumeister and Hamilton (2019), we identify the different sources of oil price shocks using a structural vector autoregressive (SVAR) model of the global market for crude oil. These structural factors are then used as unspanned factors in an affine term structure model based on the representation of Joslin et al. (2014). This is done for a total of 15 countries. Bond risk premia of net oil-exporting countries show a reaction to the structural shocks which is often statistically significant and in line with the expectation. For oil-importing developed countries, mainly the reaction to economic activity shocks is statistically significant and with the expected sign. The results for oil-importing developing countries are most of the time not statistically significant or run counter what one would expect. Among the unspanned factors, global economic activity explains most of the variability in bond risk premia. Finally, a historical decomposition around the outbreak of the COVID-19 crisis shows a variety of patterns in the evolution of bond risk premia.

Keywords: Oil prices shocks; affine term structure models; bond risk premia (search for similar items in EconPapers)
JEL-codes: C11 E43 E44 Q43 (search for similar items in EconPapers)
Pages: 43
Date: 2023-04-27
New Economics Papers: this item is included in nep-ene
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