Work

Climate Policy Uncertainty and Sovereign Credit Risk: A Multivariate Quantile on Quantile Regression Analysis

Year: 2025

Type: article

Abstract: This study investigates the nonlinear and regime-dependent relationship between climate policy uncertainty (CPU) and sovereign credit default swap (CDS) spreads across a panel of developed and emerging economies from February 2010 to March 2025. Utilizing the Quantile-on-Quantile Regression (QQR) and Multivariate QQR (MQQR) frameworks, we capture the heterogeneous effects of CPU under varying market states and assess the marginal role of global risk factors, including geopolitical risk (GPR), economic policy uncertainty (EPU), and market volatility (VIX). The findings indicate that in developed markets, CPU exerts a nonlinear impact that intensifies during periods of heightened sovereign risk, while in low-risk regimes, its effect is often muted or reversed. In contrast, emerging economies exhibit more volatile and state-contingent responses, with CPU exerting stronger effects in calm conditions but diminishing in explanatory power once global risks are taken into account. These dynamics highlight the importance of institutional credibility and financial integration in moderating CPU-driven credit risk.

Source: Risks

DOI: 10.3390/risks13090181

Author: Nader Naifar

Institution: Imam Mohammad ibn Saud Islamic University

Language: English

Topic: Credit Risk and Financial Regulations

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDG: Climate action

Open Access status: gold

Estimated APC paid: $2,172