Time Series Analysis on Credit Default Swap (CDS) and Market Indicators: The Case of Türkiye

Burak Yerlikaya
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Burak Yerlikaya: Department of Economics, Faculty of Yildiz Technical University, İstanbul, Türkiye

Yildiz Social Science Review, 2024, vol. 10, issue 2, 136-147

Abstract: Regional and global cyclical fluctuations in the world economy reveal the importance of the CDS premium for developing countries such as Türkiye, which has fragile macroeconomic indicators and is highly dependent on international funds. This study deals with the influ-ence of key economic indicators on CDS premiums with a focus on Türkiye in the period from January 2010 to March 2022, a period characterized by unconventional low-interest rate policies and economic crises, including the COVID-19 pandemic. By leveraging Türkiye’s unique policy environment and crisis experiences, the study provides a natural experiment environment for understanding the mechanisms driving CDS premiums. Using recent and monthly data, the ARDL method has been employed to determine possible long- and short-run relationships among CDS premiums, and the exchange rate ($/TL), interest rates (applied to consumer loans in TL), Istanbul Stock Exchange 100 indexes, official reserves ($1,000,000), and total domestic credit volume ($). The Granger causality test further reveals the directional relationships among these variables. The general results provide strong evidence that exchange rate volatility and credit expansion contribute to increased CDS premiums, while official reserves and stock market performance help to mitigate country risk perceptions. The bidirectional Granger causality between CDS premiums and reserves further highlights the dynamic relationship between risk perceptions and policy responses. This paper provides new insights into the economic channels influencing country risk and highlights the critical role of financial stability policies in a developing country context.

Keywords: ARDL; CDS premium; granger causality test; time series; TürkiyeJournal: Yildiz Social Science Review (search for similar items in EconPapers)
JEL-codes: F00 F30 G00 G10 K00 K20 M00 M20 O10 (search for similar items in EconPapers)
Date: 2024
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