Factors affecting sovereign CDS premium, the case of Turkey

Credit default swap (CDS) premium is an important indicator that provides information about a country's debt solvency. Using this indicator, countries' risks can be compared. Sovereign credit ratings, which are periodically performed by credit rating firms, also provide information about country creditworthines. By using monthly data from the beginning of 2005 to November 2020, which is the review period of the study, sovereign CDS premium and ratings made by Fitch, Moody's and S&P firms were compared with the graphic analysis method. It has been observed that firms are cautious in their rating upgrades, and even though it is observed that the declines in CDS premiums continue and the risk decreases, the same rating remains for a long time, and after 2016, rapid and short-term changes were made in downgrades. It has been determined that the volatility in CDS premiums has an impact on credit ratings in the medium term. According to the period of research, the effect of country's social and economic events and macroeconomic factors on sovereign CDS has been analyzed. The long and short-term effects of variables on CDS premiums were analyzed with ARDL approach. According to the analysis results, it is shown that the stock market index and the growth rate had a negative effect, and the exchange rate had a positive impact on the CDS premium in the long run. When the short-term effects of the determining variables on the CDS premium are analyzed, it is seen that the stock market index has a negative impact. In contrast, the exchange rate, the benchmark interest rate, and the country's social and economic events have a positive impact. The causality between CDS premiums and macroeconomic factors, tests by using the method developed by Toda-Yamamoto. According to the findings, there is one-way causality from stock market index and interest rate in the direction of CDS premium and there is one-way causality from CDS premium in the direction of balance of payments account and GDP, and there is no causality relationship between CDS premium and other two factors which are exchange rate and inflation rate. It has been determined that the stock market index and growth rate have a negative effect and the exchange rate has a positive effect on the CDS premium in the long run, but it has been concluded that only an unexpected shock in the stock market index cause a change on the CDS premium.