Spillovers between exchange rate pressure and CDS bid-ask spreads, reserve assets and oil prices using the quantile ARDL model

Abstract

This paper examines the quantile relationships between the Saudi Riyal (SAR) exchange rate pressure, Credit default swap (CDS) spreads, total reserve assets, and oil prices. Using the available monthly data ranging from 2008 to 2018 and employing the error correction model, the results show a negative and significant relationship between the long-run coefficient of the SAR exchange rate pressure and the long run coefficients of both the CDS and the oil price. However, the long run coefficient of the foreign reserves is statistically insignificant, thus indicating that the exchange rate pressure, CDS spread and oil price variables are cointegrated. As for the short-run coefficients, we find that the lag SAR pressure affects the current pressure. Moreover, the short-run coefficient of the foreign reserves affects negatively the SAR pressure. Moreover, using the quantile ARDL (QARDL) model, we find a significant relationship particularly in the extreme quantiles, regardless of the level or the log level series. Under the long-run coefficients, the positive (negative) relationship characterizes the nexus of the reserves-pressure and the CDS-pressure (oil-pressure) on the SAR. As for the short-run coefficients, we find that an increase in the lag SAR pressures contributes to the current pressure across all quantiles, whereas an increase in the reserves reduces the pressure in the extreme quantiles. These results have important implications for policy makers.