Title: Recent credit risk and bubble behavior in the corporate energy sector
Authors: Isabel Figuerola-Ferretti - Universidad Pontificia Comillas (Spain) [presenting]
Abstract: The relationship between oil and credit risk in the energy sector over the last two oil price crises is analyzed. We measure credit risk in energy corporations using CDS spreads and assess whether credit risk in energy companies exhibited departures from random walk behavior. By using the multiple bubble methodology proposed, we detect two main mildly explosive periods in CDS prices: a predominant mild explosive period just before the global financial crisis and another important explosive period after the recent 2014 crude oil price collapse. We relate the dated bubble episodes seen in CDS prices with the time series behavior of crude oil prices and with the level of corporate debt measured by different corporate leverage measures. Results show that the 2015 episode of mild explosivity reported for CDS prices in energy corporates is associated with an abrupt increase in debt levels and debt equity ratios following the taper tantrum in 2013 and the subsequent 2014 crude oil sell off.