Research

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Oil Price Uncertainty and Sovereign Default

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Abstract:

This paper studies how changes in the volatility of global oil price affects sovereign spreads. First, I establish a positive correlation between sovereign spreads and oil price volatility across 35 oil-importing countries. Subsequently, I introduce time-varying volatility in the global oil price within a sovereign default model with long-duration bonds for a small open economy that imports oil as a factor of production. To gauge oil price uncertainty, I employ a stochastic volatility process to model the evolution of oil prices, estimating these stochastic volatilities using Bayesian Markov Chain Monte Carlo techniques. The dynamic nature of the global oil price interacts intricately with default incentives, exerting varied effects on borrowing behavior and sovereign spreads contingent on the prevailing economic conditions. My findings indicate that during highly volatile periods, the response of sovereign spreads to fluctuations in oil price levels is three times more pronounced compared to less volatile times. Additionally, a higher debt level intensifies the sensitivity of spreads to changes in the global oil price. Importantly, borrowing decisions in response to oil price fluctuations are significantly influenced by the existing economic state. Given that the increase in spreads resulting from rising oil price levels is notably more pronounced during high volatility periods, the government opts to borrow proactively when it anticipates future oil price increases. This proactive borrowing serves as a form of insurance, enabling the government to hedge against the heightened import costs and increased borrowing rates that could arise if oil prices surge in the future.

Publications

2023

1. The bribe rate and long run differences in sovereign borrowing costs

   Farzana Alamgir, Johnny Cotoc, and Alok Johri

   Journal of Economic Dynamics and Control, 2023

2021

1. The nexus between oil price and stock market: Evidence from South Asia

   Farzana Alamgir, and Sakib Bin Amin

   Energy Reports, 2021

2018

1. Does Economic Growth Spillover More from the Eastern than the Western Countries? Evidence from Bangladesh’s Four Decades of Growth Experience

   Gour Gobinda Goswami, and Farzana Alamgir

   South Asian Survey, 2018

Working Papers

• Alamgir, F., & Johri, A. (2022). International Sovereign Spread Differences and the Poverty of Nations. Available at SSRN.