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THE RELATIONSHIP AMONG SOVEREIGN CREDIT RISK PREMIUM, SOVEREIGN BONDS AND CURRENCY RATES IN FRAGILE THREE COUNTRIES

Year 2020, Volume: 9 Issue: 3, 262 - 273, 30.09.2020

Tugba Akın Emre Isikli

https://doi.org/10.17261/Pressacademia.2020.1302

Abstract

Purpose- For developing countries that are highly dependent on foreign investment in terms of saving gap funding, risk assessment tools are crucially important. Under the evolving circumstance of flow of international funds along the last decade, this study aims to investigate into causality relationship among sovereign credit default swap premiums, interest and currency rates of “Fragile Three” Countries of Brazil, South Africa and Turkey through new generation econometric methods for the period of 2007M2-2017M1.
Methodology-To that end, stationarity, co-integration and causality relationships were analysed by means of Kapetanios’s (2005) multi-structural fractural unit root test, Johansen Cointegration Test (1990) and Toda-Yamamoto (1995) test (TY), respectively.
Findings- Our findings suggest that these variables of F3 countries are influenced substantially from each other.
Conclusion- The necessary economic policies should be developed to ensure permanent stability at exchange rate and interest rate levels. In order to ensure these countries to maintain financial stability, economic, political and social reforms are required to minimize country risks and to decrease dependency on foreign capital.

Keywords

Sovereign credit default swap premiums sovereign bond interest rates foreign currency

References

  • Augustin P., Subrahmanyam M. G., Tang, D. Y., & Wang S. Q. (2016). Credit default swaps: Past, present, and future. The Annual Review of Financial Economics, 8(10): 1–10.22.
  • Bai, J. & Perron, P. (1998). Estimating and testing linear models with multiple structural changes. Econometrica, 66 (1): 47-78.
  • Başarır Ç. & Keten M. (2016). A Cointegration analysis between CDS premiums, stock indexes and exchange rates in Emerging countries. MAE Univeristy Social Sciences Periodical, 8(15): 369-380
  • Bekkour, L., Jin, X., Lehnert, T., Rasmouki, F. & Wolff, C. (2015). Euro at risk: The impact of member countries’ credit risk on the stability of the common currency. Journal of Empirical Finance, 33: 67–83.
  • Bernanke, B. & Gertler, M. (1990). Financial fragility and economic performance. The Quarterly Journal of Economics, 105 (1): 87–114.
  • Bloomberg Statistical Database, www.bloomberg.com, [Accessed 2017]
  • Breuer A. & Sauter O. (2013). Calculating the unthinkable: Exchange rate effects of a credit event. Applied Economics Quarterly, Berlin, 58(1 ): 1-18.
  • Bozkurt, İ., (2015). Determination of the relationship between financial stability and CDS premiums by using fuzzy regression analysis: Turkey case. Gümüşhane University, Electronic Periodical of Social Sciences, 6(13): 64-80.
  • Capistrán, C. & Ramos-Francia, M. (2009). Inflation dynamics in Latin America. Contemporary Economic Policy, 27(3): 349-362.
  • Chan-Lau, J. & Kim Y. (2004). Equity prices, credit default swaps, and bond spreads In Emerging Markets. IMF Working Paper No. 27.
  • O’Kane, D. (2012). The link between Eurozone sovereign debt and CDS prices. EDHEC-Risk Institute Report
  • Duffee, D. (1999). Credit swap valuation. Financial Analysist Journal, 55: 73–87.
  • Eğilmez, M. (2013). Foreing exchange, interest, government bond, BIST, credit ranking, CDS briefly. Kendime Yazılar, http://www.mahfiegilmez.com/2013/07/kur-faiz-dibs-bist-reyting-cds-hepsi.html. [Accessed 15 February 2017].
  • ETF Trends (2017). Emerging market ETFs: Keep wath over the fragile three. https://www.etftrends.com/2015/03/emerging-market-etfs-keep-watch-over-fragile-three. [Accessed February 2017].
  • Flannery, M.J., Houston J.F. & Partnoy F. (2010). Credit default swap spreads as viable substitutes for credit ratings. University of Pennsylvania Law Review, 158: 2085.
  • Fontana, A. & Scheicher, M. (2010). An analysis of Euro Area sovereign CDS and their relation with government bonds. European Central Bank Working Paper Series – 1271.
  • Gonzalo, J. & Granger, C. (1995). Estimation of common long-memory components in cointegrated systems. Journal of Business & Economic Statistics, 13(1): 27-35.
  • Göçer, İ. & Akin, T. (2016). The effects of saving-Investment gap on economic growth in the Fragile Five: A new generation econometric analysis. Ege Akademik Bakış, 16(2):197.
  • Gujarati, D. N. & Porter, D. (2012). Temel ekonometri. Translated by: Şenesen, Ü., Şenesen, G. G., İstanbul, Literatür Press.
  • Gunes, S., Polat, F. & Akin, T. (2016). Kalkınma bağlamında büyüme, yolsuzluk ve demokrasi ilişkisi. Economic Development Social and Political Interactions, Ijopec Publication No: 25: 13-21, Turkey. ISBN: 978-0-9932118-5-0.
  • Hasbrouck, J. (1995). One security, many markets: determining the contributions to price discovery. The Journal of Finance, 50(4): 1175-1199.
  • Hatemi-J, A. & Roca, E. (2014). BRICs and PIGS in the presence of Uncle Sam and Big Brothers: Who drive who? evidence based on asymmetric causality tests. Available online: http://econpapers.repec.org/paper/griapaper/finance_3a201401.htm [Accessed February 2017].
  • Investing Statistical Database (2017), the relevant link: https://tr.investing.com/currencies/usd-try-chart [Accessed February 2017]
  • 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.
  • Kapetanios, G. (2005). Unit-root testing against the alternative hypothesis of upto m structural breaks. Journal of Time Series Analysis, Vol.26 (1): 123–133.
  • Kar, M., Bayat, T. & Kayhan, S. (2016). Impacts of credit default swaps on volatility of the exchange rate in Turkey: The case of Euro. International Journal of Financial Studies, 4 (14): 1-18.
  • Kargi, B. (2014). Credit default swap (CDS) spreads: the analysis of time series for the integration with the interest rates and the growth in Turkish economy. Montenegrin Journal of Economics, 10(1), 59-66.
  • Koy, A. (2014). An emprical study on credit default swaps and on bonds. İstanbul Ticaret University, Working Paper Series, Discussion Papers, WPS NO/ 01 / 2014-07: 1-12.
  • Kumo, W.L. (2015). Inflation Targeting Monetary Policy, Inflation Volatility and Economic Growth in South Africa. African Development Bank Group, Working Paper Series, No. 216, January.
  • Landon, T. J. (2014). Fragile five is the latest club of emerging nations in turmoil. New York Times, http://www.nytimes.com/2014/01/29/business/international/fragile-five-is-the-latest-club-of-emerging-nations-in-turmoil, [Accessed February 2017].
  • Lee, J. & Strazicich, M.C. (2003). Minimum lagrange multiplier unit root test with two structural breaks. The Review of Economics and Statistics, 85 (4): 1082-1089.
  • Lumsdaine, R.L. & Papell, D.H. (1997). Multiple trend breaks and the unit root hypothesis. The Review of Economics and Statistics, 79: 212-218.
  • Mora, N. (2006). Sovereign credit ratings: Guilty beyond reasonable doubt? Journal of Banking & Finance, 30(7): 2041–2062.
  • Mora-Jensen, D. S. (2013). The relationship between the exchange rate and sovereign credit default swaps: An empirical analysis. Master Thesis, (May 27th, 2013), Copenhagen Business School.
  • Morgan Stanley Research Report (2013). FX Pulse. http://www.morganstanleyfa.com/public/projectfiles/dce4d168-15f9-4245-9605-e37e2caf114c.pdf [Accessed February 2017].
  • Murat, S., Şener, S. & Yılancı, V. (2013). Economic crises, natural disasters, terror activities and their impact on tourists vistiing Turkey? Periodicle of Faculty of Economics, 63(1): pp. 1-15.
  • Ng, S. & Perron, P. (2001). Lag length selection and the construction of unit root tests with good size and power. Econometrica, Vol.69: 1519-1554.
  • Norden, L. & Weber, M. (2009). The Co-movement of credit default swap, bond and stock markets: An empirical analysis. European Financial Management, 15(3): 529–562.
  • Özkaplan, D. (2011). Turkish credit default swaps and relationship with financial indicators. Graduate Study Thesis, İstanbul Bilgi University.
  • Perron, P. (1989). The great crash, the oil price shock, and the unit root hypothesis. Econometrica, 57(2): 1361-1401.
  • Perron, P. (1997). Further evidence on breaking trend functions in macroeconomic variables. Journal of Econometric, 80: 355-385.
  • Sambalaibat, B. (2014). Essays in financial economics: Currency risk and pricing Kernal volatility, CDS and sovereign bond market liquidity, CDS as sovereign debt collateral. Carnegie Mellon University, Doctorate Study Thesis.
  • Schwert, W. G. (1988). Tests for unit roots: A Monte Carlo investigation. NBER Technical Working Paper Series, No: 73.
  • Skinner, F. S. & Townend, T. G. (2002). An empirical analysis of credit default swaps. International Review of Financial Analysis, 11(3): 297-309.
  • Toda, H. Y. & Taku, Y. (1995). Statistical inference in Vector Autoregressions with possibly integrated processes. Journal of Econometrics, 66(1): 225-250.
  • Whetten, M., Adelson, M. & Bemmelen M. V. (2004). Credit default swap primer, nomura fixed income research. https://tr.scribd.com/document/27781334/Credit-Default-Swap, (Accessed in 2017).
  • Yang, L., B. Morley, & J. Hudson (2010). A study of the causal relationships between sovereign CDS spreads, Risk-Free interest rates and exchange Rates. Proceedings of the 8th INFINITI Conference on International Finance, Dublin, Ireland.
  • Zhang, G., Yau J. Hung-Gay, F. (2009). Do credit default swaps predict currency vaules? Applied Financial Economics: 1-44.
  • Zivot, E. & Andrews, D. (1992). Further evidence on the great crash, the oil-price shock and the unit-root hypothesis. Journal of Business Economic Statistics, 10(3):.251-270

Year 2020, Volume: 9 Issue: 3, 262 - 273, 30.09.2020

Tugba Akın Emre Isikli

https://doi.org/10.17261/Pressacademia.2020.1302

Abstract

References

  • Augustin P., Subrahmanyam M. G., Tang, D. Y., & Wang S. Q. (2016). Credit default swaps: Past, present, and future. The Annual Review of Financial Economics, 8(10): 1–10.22.
  • Bai, J. & Perron, P. (1998). Estimating and testing linear models with multiple structural changes. Econometrica, 66 (1): 47-78.
  • Başarır Ç. & Keten M. (2016). A Cointegration analysis between CDS premiums, stock indexes and exchange rates in Emerging countries. MAE Univeristy Social Sciences Periodical, 8(15): 369-380
  • Bekkour, L., Jin, X., Lehnert, T., Rasmouki, F. & Wolff, C. (2015). Euro at risk: The impact of member countries’ credit risk on the stability of the common currency. Journal of Empirical Finance, 33: 67–83.
  • Bernanke, B. & Gertler, M. (1990). Financial fragility and economic performance. The Quarterly Journal of Economics, 105 (1): 87–114.
  • Bloomberg Statistical Database, www.bloomberg.com, [Accessed 2017]
  • Breuer A. & Sauter O. (2013). Calculating the unthinkable: Exchange rate effects of a credit event. Applied Economics Quarterly, Berlin, 58(1 ): 1-18.
  • Bozkurt, İ., (2015). Determination of the relationship between financial stability and CDS premiums by using fuzzy regression analysis: Turkey case. Gümüşhane University, Electronic Periodical of Social Sciences, 6(13): 64-80.
  • Capistrán, C. & Ramos-Francia, M. (2009). Inflation dynamics in Latin America. Contemporary Economic Policy, 27(3): 349-362.
  • Chan-Lau, J. & Kim Y. (2004). Equity prices, credit default swaps, and bond spreads In Emerging Markets. IMF Working Paper No. 27.
  • O’Kane, D. (2012). The link between Eurozone sovereign debt and CDS prices. EDHEC-Risk Institute Report
  • Duffee, D. (1999). Credit swap valuation. Financial Analysist Journal, 55: 73–87.
  • Eğilmez, M. (2013). Foreing exchange, interest, government bond, BIST, credit ranking, CDS briefly. Kendime Yazılar, http://www.mahfiegilmez.com/2013/07/kur-faiz-dibs-bist-reyting-cds-hepsi.html. [Accessed 15 February 2017].
  • ETF Trends (2017). Emerging market ETFs: Keep wath over the fragile three. https://www.etftrends.com/2015/03/emerging-market-etfs-keep-watch-over-fragile-three. [Accessed February 2017].
  • Flannery, M.J., Houston J.F. & Partnoy F. (2010). Credit default swap spreads as viable substitutes for credit ratings. University of Pennsylvania Law Review, 158: 2085.
  • Fontana, A. & Scheicher, M. (2010). An analysis of Euro Area sovereign CDS and their relation with government bonds. European Central Bank Working Paper Series – 1271.
  • Gonzalo, J. & Granger, C. (1995). Estimation of common long-memory components in cointegrated systems. Journal of Business & Economic Statistics, 13(1): 27-35.
  • Göçer, İ. & Akin, T. (2016). The effects of saving-Investment gap on economic growth in the Fragile Five: A new generation econometric analysis. Ege Akademik Bakış, 16(2):197.
  • Gujarati, D. N. & Porter, D. (2012). Temel ekonometri. Translated by: Şenesen, Ü., Şenesen, G. G., İstanbul, Literatür Press.
  • Gunes, S., Polat, F. & Akin, T. (2016). Kalkınma bağlamında büyüme, yolsuzluk ve demokrasi ilişkisi. Economic Development Social and Political Interactions, Ijopec Publication No: 25: 13-21, Turkey. ISBN: 978-0-9932118-5-0.
  • Hasbrouck, J. (1995). One security, many markets: determining the contributions to price discovery. The Journal of Finance, 50(4): 1175-1199.
  • Hatemi-J, A. & Roca, E. (2014). BRICs and PIGS in the presence of Uncle Sam and Big Brothers: Who drive who? evidence based on asymmetric causality tests. Available online: http://econpapers.repec.org/paper/griapaper/finance_3a201401.htm [Accessed February 2017].
  • Investing Statistical Database (2017), the relevant link: https://tr.investing.com/currencies/usd-try-chart [Accessed February 2017]
  • 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.
  • Kapetanios, G. (2005). Unit-root testing against the alternative hypothesis of upto m structural breaks. Journal of Time Series Analysis, Vol.26 (1): 123–133.
  • Kar, M., Bayat, T. & Kayhan, S. (2016). Impacts of credit default swaps on volatility of the exchange rate in Turkey: The case of Euro. International Journal of Financial Studies, 4 (14): 1-18.
  • Kargi, B. (2014). Credit default swap (CDS) spreads: the analysis of time series for the integration with the interest rates and the growth in Turkish economy. Montenegrin Journal of Economics, 10(1), 59-66.
  • Koy, A. (2014). An emprical study on credit default swaps and on bonds. İstanbul Ticaret University, Working Paper Series, Discussion Papers, WPS NO/ 01 / 2014-07: 1-12.
  • Kumo, W.L. (2015). Inflation Targeting Monetary Policy, Inflation Volatility and Economic Growth in South Africa. African Development Bank Group, Working Paper Series, No. 216, January.
  • Landon, T. J. (2014). Fragile five is the latest club of emerging nations in turmoil. New York Times, http://www.nytimes.com/2014/01/29/business/international/fragile-five-is-the-latest-club-of-emerging-nations-in-turmoil, [Accessed February 2017].
  • Lee, J. & Strazicich, M.C. (2003). Minimum lagrange multiplier unit root test with two structural breaks. The Review of Economics and Statistics, 85 (4): 1082-1089.
  • Lumsdaine, R.L. & Papell, D.H. (1997). Multiple trend breaks and the unit root hypothesis. The Review of Economics and Statistics, 79: 212-218.
  • Mora, N. (2006). Sovereign credit ratings: Guilty beyond reasonable doubt? Journal of Banking & Finance, 30(7): 2041–2062.
  • Mora-Jensen, D. S. (2013). The relationship between the exchange rate and sovereign credit default swaps: An empirical analysis. Master Thesis, (May 27th, 2013), Copenhagen Business School.
  • Morgan Stanley Research Report (2013). FX Pulse. http://www.morganstanleyfa.com/public/projectfiles/dce4d168-15f9-4245-9605-e37e2caf114c.pdf [Accessed February 2017].
  • Murat, S., Şener, S. & Yılancı, V. (2013). Economic crises, natural disasters, terror activities and their impact on tourists vistiing Turkey? Periodicle of Faculty of Economics, 63(1): pp. 1-15.
  • Ng, S. & Perron, P. (2001). Lag length selection and the construction of unit root tests with good size and power. Econometrica, Vol.69: 1519-1554.
  • Norden, L. & Weber, M. (2009). The Co-movement of credit default swap, bond and stock markets: An empirical analysis. European Financial Management, 15(3): 529–562.
  • Özkaplan, D. (2011). Turkish credit default swaps and relationship with financial indicators. Graduate Study Thesis, İstanbul Bilgi University.
  • Perron, P. (1989). The great crash, the oil price shock, and the unit root hypothesis. Econometrica, 57(2): 1361-1401.
  • Perron, P. (1997). Further evidence on breaking trend functions in macroeconomic variables. Journal of Econometric, 80: 355-385.
  • Sambalaibat, B. (2014). Essays in financial economics: Currency risk and pricing Kernal volatility, CDS and sovereign bond market liquidity, CDS as sovereign debt collateral. Carnegie Mellon University, Doctorate Study Thesis.
  • Schwert, W. G. (1988). Tests for unit roots: A Monte Carlo investigation. NBER Technical Working Paper Series, No: 73.
  • Skinner, F. S. & Townend, T. G. (2002). An empirical analysis of credit default swaps. International Review of Financial Analysis, 11(3): 297-309.
  • Toda, H. Y. & Taku, Y. (1995). Statistical inference in Vector Autoregressions with possibly integrated processes. Journal of Econometrics, 66(1): 225-250.
  • Whetten, M., Adelson, M. & Bemmelen M. V. (2004). Credit default swap primer, nomura fixed income research. https://tr.scribd.com/document/27781334/Credit-Default-Swap, (Accessed in 2017).
  • Yang, L., B. Morley, & J. Hudson (2010). A study of the causal relationships between sovereign CDS spreads, Risk-Free interest rates and exchange Rates. Proceedings of the 8th INFINITI Conference on International Finance, Dublin, Ireland.
  • Zhang, G., Yau J. Hung-Gay, F. (2009). Do credit default swaps predict currency vaules? Applied Financial Economics: 1-44.
  • Zivot, E. & Andrews, D. (1992). Further evidence on the great crash, the oil-price shock and the unit-root hypothesis. Journal of Business Economic Statistics, 10(3):.251-270
There are 49 citations in total.

Details

Primary Language English
Subjects Finance, Business Administration
Journal Section Articles
Authors

Tugba Akın This is me 0000-0002-1132-388X

Emre Isikli This is me 0000-0003-4148-7655

Publication Date September 30, 2020
Published in Issue Year 2020 Volume: 9 Issue: 3

Cite

APA Akın, T., & Isikli, E. (2020). THE RELATIONSHIP AMONG SOVEREIGN CREDIT RISK PREMIUM, SOVEREIGN BONDS AND CURRENCY RATES IN FRAGILE THREE COUNTRIES. Journal of Business Economics and Finance, 9(3), 262-273. https://doi.org/10.17261/Pressacademia.2020.1302

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