Dollarization and Credit Default Swap relationship (CDS): The case of Turkey

Dollarization is the use of a foreign currency instead of a country's local currency, typically arising from factors such as economic uncertainties, high inflation, and distrust in the local currency. Credit Default Swaps (CDS) are financial instruments that protect investors against the risk of a borrower defaulting. This thesis investigates the impact of dollarization on Credit Default Swap (CDS) premiums in Turkey. The study thoroughly examines the definition of dollarization, its types (full dollarization, partial dollarization, currency substitution, deposit dollarization, debt dollarization, asset dollarization, financial dollarization, reverse dollarization), and its causes (inflation, dollarization hysteresis, original sin, economic uncertainty, and distrust in economic policies). The positive and negative aspects of dollarization and its measurement methods are also discussed. The historical process of dollarization in Turkey is comprehensively reviewed. Additionally, information on the definition, functioning, and uses of CDS, as well as Turkey's CDS premiums, is provided. In the empirical analysis, various econometric methods were used to determine the relationship between dollarization and CDS premiums in Turkey. The dataset includes Turkey's CDS premiums and deposit and loan dollarization levels. First, the Augmented Dickey-Fuller (ADF) Unit Root Test was applied to test the stationarity of the data. Then, the Johansen Cointegration Test was used to identify long-term relationships between the variables. Finally, regression analysis was conducted to determine the impact of dollarization on CDS premiums. The analysis results show that dollarization has a significant impact on CDS premiums in Turkey. These findings indicate that dollarization negatively affects financial stability and increases the country's risk premiums.