The effect of Credit Default Swap (CDS) premiums on foreign portfolio investments: The case of Türkiye

Credit risks of countries may vary depending on the depth of their financial markets and the international trade policies they implement. Before investing in countries, foreign portfolio investors conduct preliminary research on the countries to invest in, as they are affected by country credit risks. As an alternative to country credit ratings given by country credit rating agencies, investors also consider country CDS (credit default swap) premiums and country CDS premiums are frequently followed by foreign investors and serve as a compass. As a result, it's important to examine the effect of credit default swap premiums on foreign portfolio investments, considered an important indicator measuring the country's credit risk. This study examines the impact of credit default swap premiums on foreign portfolio investments in Turkey between 2010 Q1 and 2024Q1. Foreign portfolio investment data in the study are from T.R. The Central Bank was obtained from the EVDS platform, and Türkiye 5-year CDS premiums were obtained from the Investing terminal. As a methodology, it is planned to apply the ARDL (Autoregressive Distributed Lag) test which is one of the main time series methods generally accepted in the literature, unit root tests and diagnostic tests. Based on the analysis results, it has been determined that country CDS premiums negatively affect foreign portfolio investments in Turkey and there is a cointegration between these two variables. In addition, it was concluded that in 98 days (14 weeks) short-term fluctuations converged with long-term fluctuations and reached equilibrium. During the review period, in the 2012 Q4 period, the CDS premium reached its lowest value (128.11) in 15 years, while portfolio investments reached their highest value in the same period. Additionally, it was determined that there were serious portfolio outflows with sudden increases in CDS premiums in the 2015 Q3, 2018 Q3, 2020 Q2, and 2022 Q2 periods.