Tail dependencies in sovereign risk: quantile approaches in BRIC economies

Purpose This study examines the quantile-specific impact of key domestic and global macro-financial factors on the spread of sovereign credit default swaps (CDSs) in emerging economies, including Brazil, Russia, India and China (BRIC). It further investigates these dynamics under extreme uncertainty triggered by global crises, including the COVID-19 pandemic, the armed conflict between Russia and Ukraine, the 2015 Chinese stock market crash and the ongoing Israel–Palestine crisis. Design/methodology/approach Using monthly data from 2008 to 2023 obtained from Refinitiv Eikon, the study adopts a dual-method framework: the method of moments quantile regression (MMQR) and the quantile-on-quantile regression (QQR) approach. This combination enables a detailed assessment of how varying quantiles of macroeconomic indicators impact different segments of the CDS spread distribution, capturing asymmetric dependencies under diverse market conditions. Findings The findings show that sovereign CDS spreads react to explanatory variables across different quantiles during global crises, such as the COVID-19 pandemic, the Russian–Ukraine conflict, the 2015 Chinese stock market crash and the ongoing Israel–Palestine crisis. At lower quantiles during low-risk periods, variables such as the stock exchange index, gold prices, real interest rates and foreign exchange rate exhibit a weak relationship with sovereign CDS spreads. However, at upper quantiles in high-risk situations, sovereign credit risk becomes highly sensitive and significantly increases in response to the EPU index, VIX and MSCI Asia index. This heterogeneity underscores the limitations of traditional mean-based approaches. It highlights the advantages of quantile-based models in capturing the dynamic behavior of sovereign credit risk under varying market conditions. Research limitations/implications Findings are specific to BRIC economies and may not generalize to all emerging markets. Future studies could extend the scope to other regions or incorporate institutional and Environmental, Social, and Governance (ESG) factors. Practical implications The study offers policymakers actionable insights to manage sovereign risk through enhanced market stability, clearer policy, crisis preparedness and regional economic cooperation. Originality/value This study uniquely applies a QQR framework to sovereign CDS analysis, offering novel insights into how credit risk evolves across market conditions in emerging economies. By explicitly incorporating the 2015 Chinese stock market crash alongside other major crises, the study strengthens the robustness of its findings on tail-dependent risk behavior.