Credit default swaps (CDS) premiums and stock returns relations: An econometric analysis on Turkish financial markets

The gradual disappearence of economic borders and the newly emerging investor type called global investor have led to the need to have quick knowledge about the condition of the economy of invested country. As a result, credit default swap (CDS) premiums which are a kind of credit derivative, which emerged at the end of 1990s and became widespread in the 2000s as a kind of insurance against the risk of not paying debt, are used as a practical indicator - stock return - of the current state of an economy. For this reason, in this study, it is investigated that whether Turkey's CDS premiums are a performance enhancing factor in the forecasting of BIST100 index daily returns by using econometric methods. After applying basic statistical tests to BIST100 index and Turkey's CDS premiums, autoregressive moving average (ARMA) models and ARCH, GARCH, TGARCH, EGARCH and APGARCH models of autoregressive conditional heteroscedasticity (ARCH) models are used to determine the architecture which models the the series best in time series analysis. In the study, it is found that CDS premiums are a factor that increases the performance of BIST100 index forecasting during pre-crisis and the global economic crisis period, but the same findings were not obtained the post-crisis period.