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

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 a ne 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.

JEL Classification: C11, E43, E44, Q43