Causality relation between CDS premiums and exchange rates: Example of Turkey

In this study, the relationship between CDS premiums and exchange rates are analyzed with time series analyzes on the daily frequency covering the period of January 02, 2009 - December 31, 2018. In the study, 5-year maturity CDS premium of Turkey to the US dollar / Turkish lira selling rate variables are used to test causality. Accordingly, at first, the stability process of variables are analyzed with ADF, PP and KPSS unit root tests and it is determined that the variables are stationary in the first differences. The existence of long-term relationship between variables is analyzed by Johansen Cointegration Test and it is determined that there is no cointegration. Since cointegration is not determined, VAR model is established, then the causality relationship between variables are analyzed by Granger Causality Test. Bi-directional causality relationship is determined from CDS premiums to exchange rate and from exchange rate to CDS premiums. According to the results, the variables do not move together in the long term. In the short term, CDS premiums and exchange rates interact. Keywords: CDS Premium, Exchange Rate, Credit Risk, Granger Causality Test