Investigating Türkiye’s financial nexus: A wavelet coherence analysis of sovereign CDS spreads, bond yields, stock index, and FX rates

Year 2024, Volume: 4 Issue: 4, 395 - 415, 30.12.2024

Şükriye Tüysüz , Mert Gül

https://doi.org/10.53391/mmnsa.1455355

Abstract

This article investigates the intricate relationships between sovereign credit default swaps (CDS) and various Turkish financial assets, including the US Dollar to Turkish Lira exchange rate (USDTRY), the Borsa Istanbul 100 (XU100) stock index, and government bond yields. Employing a rigorous wavelet coherence analysis that captures the timefrequency domain, this study utilizes daily data from November 2008 to July 2022 period containing important financial, economic and global health crises, such as Great Recession, European Debt Crises, and COVID-19 pandemic. The wavelet coherence results uncover that the causality between variables is contingent on both the frequency domain and evolves dynamically over time, with the most significant interdependencies manifesting in the medium term. Moreover, the analysis reveals that government bond yields, and their respective volatilities positively impact CDS spread and its volatility. Similarly, the USDTRY rate leads to positive changes in the CDS spread. By contrast, the volatility of CDS spreads positively influences foreign exchange volatility and the XU100 index volatility. The CDS spread negatively affects the XU100 index. Overall, the findings elucidate the direction of causality between Turkish CDS spread and retained Turkish financial assets and then provide valuable information on the predictive power of those securities for investors, financial risk managers, and policymakers.

Keywords

Time-series models, asset pricing, Credit default swap, wavelet coherence analysis

Ethical Statement

Non-financial interests are directly or indirectly related to the work submitted for publication.

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