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The Role of Macroeconomic and Market Indicators in Explaining Sovereign Credit Default Swaps (CDS) Spread Changes: Evidence from Türkiye

Mustafa Tevfik Kartal ()
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Mustafa Tevfik Kartal: Borsa İstanbul Strategic Planning, Financial Reporting, and Investor Relations Directorate, İstanbul/Türkiye. Address: Reşitpaşa Mahallesi Borsa İstanbul Caddesi No: 4 34467 Sarıyer, İstanbul/Türkiye

Journal for Economic Forecasting, 2022, issue 2, 145-164

Abstract: The study investigates the role of macroeconomic and market indicators on Türkiye’s sovereign CDS spreads, which represent the riskiness and vulnerability in terms of credit default that affects foreign investment flows. In this context, Türkiye, which has high and volatile CDS spreads, is selected, and ten explanatory indicators including five macroeconomic and five market are selected. Moreover, monthly data between January 2010 and January 2022, which covers the most recent accessible data, is used and multivariate adaptive regression splines (MARS) approach is performed. The empirical results reveal that (i) all macroeconomic and market indicators used in the analysis have a significant effect on the CDS spreads; (ii) foreign exchange (FX) rates, Treasury bond interest rates, and deposit interest rates are the most influential three indicators, whereas credit interest rate and industrial production index are the least effective indicators; (iii) the effects of the indicators changes according to different thresholds; (iv) the effect of the indicators vary according to interactions with other indicators. Overall, excluding FX rates, the market indicators have higher importance with regard to the macroeconomic indicators in terms of effects on the CDS spreads. Furthermore, policy implications regarding having low-level CDS spreads to stimulate foreign investments inflows are discussed by considering the boundaries of the study. Hence, Türkiye as well as other emerging countries can have low-level CDS spreads by decreasing the adverse effects of the influential indicators.

Keywords: CDS spreads; macroeconomic indicators; market indicators; MARS, Türkiye (search for similar items in EconPapers)
JEL-codes: C22 E44 F31 G12 (search for similar items in EconPapers)
Date: 2022
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Handle: RePEc:rjr:romjef:v::y:2022:i:2:p:145-164