The Impact of Financial Drivers on Credit Default Swap (CDS) in Turkey: The Cointegration with Structural Breaks and FMOLS Approach

Abstract

The CDS premium is considered to be an important criterion in the risk premiums of countries with emerging markets and it also provides important information about the credibility of these countries for investors. Decreasing the level of CDS for developing countries helps investors to work with the country and smoothes the way for investments in financial assets. Hence, determining the factors which can affect changes in the CDS of these countries has beco me crucial for their economies. Thus, the relationship between Turkey’s CDS for 5 years and financial factors have been analyzed through
the monthly data for the period between 2012 and 2020. For this purpose, the existence of the long-run relationship between the series was investigated by Gregory-Hansen (1996) and Hatemi-J (2008) and it was seen that the series are cointegrated. Afterwards, the long-run coefficients between the series were estimated by FMOLS. The results indicate that the BIST100 index and liquid liabilities have a positive effect on CDS and that the domestic credit volume of the banking sector has a negative effect on CDS. Furthermore, the estimated break dates suggest that significant events are occurring in the Turkish economy.

Keywords

• Credit Risk
• Financial Factors
• Structural Breaks
• Cointegration
• Turkey

References

1. Adom, P. K., Amakye, K., Barnor C., & Quartey, G. (2015). The long-run impact of idiosyncratic and common shocks on industry output in Ghana. OPEC Energy Review, 39(1), 17-52.
2. Ahmad, F., & Bashir, T. (2013). Explanatory power of bank specific variables as determinants of non-performing loans: Evidence from Pakistan banking sector. World Applied Sciences Journal, 22(9), 1220-1231.
3. Aizenman, J., Hutchison, M. M., & Jinjarak, Y. (2013). What is the risk of European sovereign debt defaults? Fiscal space, CDS spreads and market pricing of risk. Journal of International Money and Finance, Elsevier, 34(C), 37-59.
4. Akkaya, M. (2017). Analysis of internal factors affecting CDS premium of Turkish treasuries. Journal of Finance Letters, 107, 129-146.
5. Aksoylu, E., & Gormus, S. (2018). Credit default swaps as an indicator of sovereign risk in developing countries: Asymmetric causality method. The International Journal of Economic and Social Research, 14(1), 15-33.
6. Altay, H., & Yilmaz, A. (2016). Analysing the effect of export on employment in Turkish economy. Finans Politik & Ekonomik Yorumlar, 53(616), 75-86.
7. Amato, J. (2005). Risk aversion and risk premia in the CDS market. BIS Quarterly Review, December, 55-68.
8. Atmisdortoglu, A. (2019). Credit default swaps and the research on selected indicators in emerging markets. PressAcademia Procedia, 10, 42-49.

9. Avci, O. B. (2020). Interaction between CDS premium and stock markets: Case of Turkey. Academic Review of Economics and Administrative Sciences, 13(1), 1-8.
10. Baltaci, N., Akyol, H. (2016). Examination of the macroeconomic variables affecting credit default swaps. Journal of Eco. Bibliography, 3(4), 610-625.
11. Basarir, C., & Keten, M. (2016). A cointegration analysis between CDS premium, stock indexes and exchange rates in emerging countries. Mehmet Akif Ersoy University Jou. of Soc. Sciences Institute, 8(15), 369-380.
12. Bashier, A. A., & Siam, A. J. (2014). Immigration and economic growth in Jordan: FMOLS approach. International Journal of Humanities Social Sciences and Education, 1(9), 85-92.
13. Bashir, F., Iqbal, M. M., & Nasim, S. (2015). Exports-led growth hypothesis: The econometric evidence from Pakistan. Canadian Social Science, 11(7), 86-95.
14. Bozkurt, C., & Okumus, I. (2015). The effects of economic growth, energy consumption, trade openness and population density on co2 emissions in Turkey: A cointegration analysis with structural breaks. Mustafa Kemal University Journal of Social Sciences Institute, 12(32), 23-35.
15. Bozkurt, I. (2015). Determination of the relationship between financial stability and CDS premium by using fuzzy regression analysis: Evidence from Turkey. Gümüşhane Univ. Jou. of Soc. Sciences Institute, 6(13), 64-80.
16. Caglar, A. E., & Mert, M. (2017). Environmental Kuznets hypothesis and the ımpact of renewable energy consumption on carbon emissions in Turkey: Cointegration with structural breaks approach. Journal of Management and Economics, 24(1), 21-38.
17. Chan, K. C., Fung, H. G., & Zhang, G. (2008). On the relationship between Asian sovereign credit default swap markets and equity markets. Journal of Asia Business Studies, 4(1), 1-31.
18. Coronado, M., Corzo, M. T., & Lazcano, L. (2012). A case for Europe: The relationship between sovereign CDS and stock indexes. Frontiers in Finance and Economics, 9(2), 32-63.
19. Danaci, M. C., Sit, M., Sit, A. (2017). Relationship between credit default swaps (CDS) and growth rate: A case of Turkey. Journal of Aksaray University Faculty of Econ. and Admin. Sciences, 9(2), 67-78.
20. Degirmenci, N., & Pabuccu, H. (2016). Relationship between Istanbul stock market and credit default swap: VAR and NARX model. The Journal of Academic Social Science, 4(35), 248-261.
21. Dickey, D. A., & Fuller, W. A. (1979). Distribution of the estimators for autoregressive time series with a unit root. Journal of the American Statistical Association, 74, 427-431.
22. Dinc, M., Yildiz, U., & Kirca, M. (2018). Econometric analysis of structural breaks in Turkey's credit default swap (CDS). International Journal of Econ. and Admin. Studies, 2018(Special Issue), 181-182.
23. Engle, R. F., & Granger, C. W. J. (1987). Cointegration and error-correction: representation, estimation and testing. Econometrica, 66, 251-276.
24. Eren, M., & Basar, S. (2016). Effects of credit default swaps (CDS) on BIST-100 index. Ecoforum, 5(Special Issue), 123-129.
25. Ersan, I., & Gunay, S. (2009). Kredi riski göstergesi olarak kredi temerrüt swapları (CDSs) ve kapatma davasinin Türkiye riski üzerine etkisine dair bir uygulama. Bankacılar Dergisi, 71, 3-22.
26. Ertugrul, H. M., & Ozturk, H. (2013). The drivers of credit default swap prices: Evidence from selected emerging market countries. Emerging Markets Finance & Trade, 49(5), 228-249.
27. Eyssell, T., Fung, H. G., & Zhang, G. (2013). Determinants and price discovery of china sovereign credit default swaps. China Economic Review, 24, 1-15.
28. Fender, I., Hayo, B., & Neuenkirch, M. (2012). Daily pricing of emerging market sovereign CDS before and during the global financial crisis. Journal of Banking and Finance, 36(10), 2786-2794.
29. Fontana, A., & Scheicher, M. (2010). An analysis of euro area sovereign CDS. European Central Bank Working Paper Series, No.1271.
30. Fontana, A., & Scheicher, M. (2016). An analysis of euro area sovereign CDS and Their relation with government bonds. Journal of Banking & Finance, Elsevier, 62(C), 126-140.
31. Gregory, A. W., & Hansen, B. E. (1996). Residual-based tests for cointegration in models with regime shifts. Journal of Econometrics, 70, 99-126.
32. Gun, M., Kutlu, M., & Karamustafa, O. (2016). The effects of Gezi Park protests on Turkey’s credit default swaps (CDS). Journal of Business Research-Turk, 8(1), 556-575.
33. Guner, B., & Azgun, S. (2019). The relationship between primary energy consumption and economic growth in Turkey: A dynamic analysis. The Journal of Social Sciences Institute, 46, 139-169.
34. Hanci, G. (2014). Analyzing the relationship between the credit default swaps and BIST-100. Journal of Finance Letters, 28(102), 9-22.
35. Hatemi-J, A. (2008). Tests for cointegration with two unknown regime shifts with an application to financial market integration. Empirical Economics, 35, 497-505.
36. https://tr.investing.com/rates-bonds/turkey-cds-5-year-usd
37. https://www.tcmb.gov.tr/wps/wcm/connect/EN/TCMB+EN/Main+Menu/Statistics
38. Hull, J., & White, A. (2001). Valuing credit default swaps II: Modelling default correlations. Journal of Derivatives, 8(3), 12-22.
39. Hull, J. C. (2012). Options, Futures and Other Derivatives. Pearson Education Ltd., United Kingdom.
40. Hull, J., Predescu, M., & White, A. (2004). The relationship between credit default swap spreads, bond yields, and credit rating announcements. Journal of Banking & Finance, 28(11), 2789-2811.
41. Ibrahim, S. (2009). East Asian financial integration: A Cointegration test allowing for structural break and the role of regional institutions. Int. Journal of Economics and Management, 3(1), 184-203.
42. Johansen, S., & Juselius, K. (1990). Maximum Likelihood estimation and inference on cointegration with applications to the demand for money. Oxford Bulletin of Economics and Statistics, 52(2), 169-210.
43. Kara, M., & Bas, G. (2019). The effect of growth in total credit size on non-performing loans. Journal of Social, Humanities and Administrative Sciences, 5(16), 351-357.
44. Kilci, E. N. (2019). Analysis of the impact of foreign debt on sovereign CDS premium: The case of Turkey. Journal of Turkish Court of Accounts, 112, 75-92.
45. Kocsis, Z., & Monostori, Z. (2016). The role of country-specific fundamentals in sovereign CDS spreads: Eastern European experiences. Emerging Markets Review, 27, 140-168.
46. Koy, A. (2014). An empirical study on credit default swaps’ spreads and bond spreads. International Review of Economics and Management, 2(2), 63-79.
47. Kucukaksoy, I., Ciftci, I., & Ozbek, R. I. (2015). Export-led growth hypothesis: Turkey application. Çankırı Karatekin University Jou. of The Faculty of Eco. and Admin. Sciences, 5(2), 691-720.
48. Le, T. H., & Chang, Y. (2012). Oil price shocks and gold returns. International Economics, 131, 71-104.
49. Liu, Y., & Morley, B. (2012). Sovereign credit default swaps and the macroeconomy. Applied Economics Letters 19, 129-132.
50. Longstaff, F. A, Pan, J., Pedersen, L. H., & Singleton, K. J. (2011). How sovereign is sovereign credit risk? American Economic Journal: Macroeconomics, 3(2), 75-103.
51. Maki, D. (2012). Tests for cointegration allowing for an unknown number of breaks. Economic Modelling, 29(5), 2011-2015.
52. Mateev, M., & Marinova, E. (2019). Relation between credit default swap spreads and stock prices: A non-linear perspective. Journal of Economics and Finance, 43, 1-26.
53. Mateev, M., & Marinova, E. (2019). Relation between credit default swap spreads and stock prices: A non-linear perspective. Journal of Economics and Finance, 43, 1-26.
54. Mehmood, B., & Shahid, A. (2014). Aviation demand and economic growth in the Czech Republic: Cointegration estimation and causality analysis. Statistika, 94(1), 54-63.
55. Mert, M., & Caglar, A. E. (2019). Eviews and Gauss Uygulamalı Zaman Serileri Analizi. Detay Publication, Ankara.
56. Messai, A. S., & Jouini, F. (2013). Micro and macro determinants of non-performing loans. International Journal of Economics and Financial Issues, 3(4), 852-860.
57. Munyas, T. (2018). An econometric analysis related to evaluating to the relation between CDS premium and market data: A case study in Turkey. Atlas Int. Ref. Jou. on Social Sciences, 4(15), 1689-1696.
58. Pan, J., & Singleton, K. J. (2008). Default and recovery implicit in the term structure of sovereign CDS spreads. The Journal of Finance, 63(5), 2345-2384.
59. Perron, P. (1997). Further evidence on breaking trend functions in macroeconomic variables. Journal of Econometrics, 80(2), 355-385.
60. Phillips, P. (1987). Time series regression with a unit root. Econometrica, 55(2), 277-301.
61. Phillips, P. C. B., & Hansen, B. E. (1990). Statistical inference in instrumental variables regression with I(1) processes. Review of Eco. Studies, 57, 99-125.
62. Phillips, P. C. B., & Perron, P. (1988). Testing for a unit root in time series regression. Biometrica, 75(2), 335-346.
63. Sadeghzadeh, K. (2019). Sensitivity of stock indices to country risks: Analysis on selected countries. Atatürk University Journal of Economics and Administrative Sciences, 33(2) 435-450.
64. Sarigul, H., & Sengelen, H. E. (2020). The link between sovereign credit default swaps and bank stock prices: An empirical study on bank stocks in the Borsa Istanbul. The Journal of Accounting and Finance, 86, 205-222.
65. Sevil, G., & Unkaracalar, T. (2020). An assessment of the relationship between CDS spreads and portfolio investments: Turkey case. Journal of Finance Letters, 113, 285-300.
66. Stock, J. H., & Watson, M. (1993). A simple estimator of cointegrating vectors in higher order integrated systems. Econometrica, 61, 783-820.
67. Telek, C., & Sit, A. (2017). The examination of the relationship between non-performing loans and risk premiums in Turkey: the term of 2005-2015. Int. Jou. of Disciplines Econ. & Administ. Sci. Studies, 3(3), 152-161.
68. Tirasoglu, M., & Yildirim, B. (2012). Health Expenditure and economic growth relationship in the case of structural break: A case study for Turkey. Electronic Journal of Vocational Colleges, 2(2), 111-117.
69. Vazquez, F., Tabak, B., & Souto, M. (2012). A macro stress test model of credit risk for the Brazilian banking sector. Journal of Financial Stability, 8(2), 69-83.
70. Vithessonthi, C. (2016). Deflation, bank credit growth, and non-performing loans: Evidence from Japan. International Review of Financial Analysis, 45, 295-305.
71. Yenice, S., & Hazar, A. (2015). A study for the interaction between risk premiums and stock exchange in developing countries. Journal of Economics, Finance and Accounting, 2(2), 135-151.
72. Yilanci, V., & Ozcan, B. (2010). Analyzing the relationship between defence expenditures and GNP for Turkey under structural breaks. Cumhuriyet Univ. Jou. of Econ. and Administ. Sciences, 11(1), 21-33.
73. Zhang, G., Yau, J., & Fung, H. G. (2010). Do credit default swaps predict currency values? Applied Financial Economics, 20(6), 439-458.
74. Zivot, E., & Andrews, D. W. K. (1992). Further evidence on the great crash, the oil price shock and the unit root hypothesis. Journal of Business and Economic Statistics, 10(3), 251-270.