Modelling the dynamic effects of oil shocks on sovereign bonds

: empirical evidence from a VAR model

Abstract

There is a significant research gap regarding how oil shocks affect the yield curve of oilimporting countries. Although sovereign bonds and their term structure are the backbone of modern finance, asset management and asset pricing, their resilience to oil shocks is largely underexplored. There is evidence that oil shocks might strongly impact the yield curve. Complementary, this thesis expands the analysis to several oil-importing countries as well as to different kinds of oil shocks by investigating the term-structure dynamics as a response to oil shocks and by comparing the modelled impulse responses to real-world shock responses to gain further understanding whether the appearance of shocks can be utilised to execute macro trades or hedges. Accordingly, country-specific VAR models are defined to capture the impulse response dynamics on the Nelson-Siegel modelled sovereign bond yields for oil shocks. This study underlines that oil shocks are a driver of the yield curve, although their effects are promptly superseded by other external factors. The ability to capture such dynamics varies by country, type of shock, and timing, which precludes the robust approximation of the real yield curve movement. As a result, the usage of these specific models within a practical trading or hedging environment proves to be limited.

Date of Award	16 Oct 2025
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Eva Schliephake (Supervisor)