The relationship of credit default swaps and stock market finance sector indices: A research on the G20 countries

This study aims to investigate the relationship between Credit Default Swaps (CDS) and stock market financial sector indices in G20 countries. The relationship between these financial instruments was analyzed using daily closing prices from April 1, 2019, to March 28, 2024. The data were logarithmically transformed and analyzed using the Augmented Dickey-Fuller (ADF) test, Phillips-Perron (PP) unit root tests, and Zivot-Andrews broken unit root test to test stationarity. Appropriate lag lengths were determined and then Granger causality and Hatemi-J asymmetric causality tests were performed to determine the causality relationship. The results reveal significant negative correlations between CDS and stock indices in most countries; This shows that an increase in perceived risk leads to a decrease in financial sector index prices. While Granger causality and Hatemi-J asymmetric causality tests show bidirectional causality in many developed markets, the relationship is less clear in emerging markets. This finding suggests that in developed markets, information flow and economic shocks disseminate more quickly and effectively, whereas such dynamics are more limited in emerging markets. In conclusion, this study contributes to the understanding of the dynamics between credit risk and stock markets, providing valuable information to investors and policymakers in managing financial risks and developing economic strategies.