Relationship between carry trade indeks and CDS spreads: An aplication for Turkey

Investors, who searched for new investments, have started to use the 'carry trade' investment strategy based on the strategy of investing in high interest countries by borrowing from low interest countries with the increase in global liquidity and developing information technologies. It is of great importance that international investors evaluate the risks they face in their investment processes by making use of interest rate differences between countries. The aim of this study is to reveal the relationship between CDS premiums used in measuring the credit risk of the country and carry trade investments arising from interest rate differences between countries. Exchange rates (euro and dollar), bond rates and global volatility index (VIX), which are the main determinants of Carry trade investments, were included in the study and the monthly data between January 2009 and June 2018 were analyzed in the study. The relationship between the variables was first tried to be estimated by the linear ARDL model. The lack of statistical significance of the long-term coefficients as a result of the linear ARDL model brought with it the implementation of the nonlinear ARDL model. As a result of the study, according to ARDL short term estimation results and NARDL long and short term results, a negative relationship was found between carry trade and CDS premium, dollar and euro, while no statistically significant relationship was found between bond and VIX index. Keywords: Credit Risk, Credit Derivative Products, Credit Default Swap(CDS), Carry Trade, ARDL, NARDL