Abstract
The objectives of the study are to measure how resilience and vulnerability jointly affect systemic tail risk and identify net risk transmitters/receivers in the CDS network under different market regimes. Using daily 5-year sovereign CDS data obtained from Refinitiv DataStream spanning from 8 October 2009 to 15 May 2025, combined with climate resilience (RSL) and vulnerability (VLN) indicators from the ND-GAIN database. Countries are classified according to their energy reliance: non-renewable energy reliant countries and renewable-reliant
The paper follows a methodology that maps out sovereign CDS networks through a quantile VAR based Diebold-Yilmaz spillover framework to obtain total and directional connectedness, then quantifies tail risk by estimating quantile VaR and computing CVaR (Expected Shortfall - ES) of the spillover indices in different regimes. Tail episodes are then explained with a parsimonious regression of connectedness on RSL, VLN and controls variables Economic policy uncertainty (EPU) obtained from policyuncertainty.com database and the Standard & Poor’s 500 index returns (S&P500) obtained from yahoo-finance.
Results show that systemic connectedness increases substantially during extreme market conditions, rising from approximately 62% under normal conditions (τ = 0.50) to above 84% in bearish regimes (τ = 0.05) and 81% in bullish regimes (τ = 0.95). For non-renewable energy-reliant economies, the United States and Qatar act as dominant net transmitters in bearish regimes, while Korea and Indonesia emerge as net receivers. Among renewable-reliant economies, Brazil and Colombia transmit tail shocks, whereas Costa Rica and Sweden consistently absorb them. Quantile regression estimates indicate that climate resilience significantly mitigates systemic tail risk, with an increase in resilience reducing extreme connectedness by approximately 0.45 percentage points (p < 0.05). In contrast, climate vulnerability amplifies tail spillovers, increasing extreme connectedness by roughly 0.62 percentage points (p < 0.01).
These findings highlight that, non-renewable reliant countries should focus on building resilience through energy diversification, disaster insurance and stronger fiscal buffers. Countries like Qatar and Indonesia can expedite their transition policy outlook to reduce tail risk amplification. Renewable-energy reliant countries should channel adaptation funding towards shock-absorbing economies.