CDS Returns' Volatility and Traders' Reactions
Abstract
Credit default swap (CDS) premiums on a country's bonds are significant indicators of its risk profile. A decline in CDS premiums is perceived positively by investors, often triggering expectations of a rise in stock markets, and vice versa. This study examines the effects of significant changes in Türkiye's 5-year CDS premiums on investor behavior, using daily data from 03/03/2008 to 31/10/2024 for the XBANK index, representing the banking sector, and the XU100 index, representing the aggregate market. For examining market reactions, an event study approach was adopted. The days during which changes in daily CDS prices exceeded ±5% were specified as event days, and comparisons were made by evaluating stock returns between opening and closing market prices on indices for those days. The analysis indicates that market participants reacted to changes in the banking sector to a higher extent compared to changes in the aggregate market, as well as to a larger extent to an increase compared to a decrease in CDS prices. Buy-and-sell strategies simulating these reactions showed positive returns.
Keywords
CDS , BIST , Investment , Portfolio
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