Volatility Transmission from Commodity Markets to Sovereign CDS Spreads in Emerging and Frontier Countries

Abstract

We investigate the volatility transmission from commodities to sovereign credit defaults swaps (CDS) spreads of emerging and frontier markets. Using daily data for seventeen emerging and eight frontier countries, we document a significant volatility spillover from commodity markets to sovereign CDS spreads of emerging and frontier markets. We find that this effect is strong for most of the countries in our sample, but the results differ by country. We also examine whether energy prices are the main driver of the transmission of volatility and our results show still significant, albeit diminished, spillover effects when oil and gas are excluded from the commodity index.

Keywords: Volatility, commodities, energy commodities, sovereign CDS, emerging markets, frontier countries

JEL Classification: C30