Credit default swaps and a comparative analysis on emerging markets

Credit derivatives are financial instruments designed to transfer credit risk arising from underlying asset. The simplest form of credit derivatives are credit default swap contracts. Although credit derivatives usage may differ according to banks, financial institutions or other investors, credit default swaps are widely used as an indicator of credit risk. Market size, high liquidity, number of participants and daily pricing have allowed the market to be monitored closely. In this study, after the explanations on credit risk, credit derivatives and credit default swap contracts, the factors that affecting sovereign credit default swap spreads, used as an indicator of sovereign credit risk, was investigated within the context of emerging markets. In the study, the effects of external debt ratio, international reserves ratio and real effective exchange rate on sovereign credit default swap spreads were analyzed with heterogeneous panel data method, by using quarterly data between 2005-2016. After performing preliminary tests such as homogeneity, cross-section dependence and unit root, the current period was analyzed by using the Augmented Mean Group method. Based on this model, also long term relations were examined with Gengenbach, Urbain and Westerlund Panel Cointegration Test, Pedroni DOLSMG test and Dumitrescu-Hurlin Causality Test. It is concluded that crisis and external debt ratio have a positive and significant effects on sovereign credit default swap spreads, while real effective exchange rates and reserves have negative and significant effects. In addition, according to the long run results international reserv ratio is statistically insignificant.