The effect of CDS premiums on stock market indexes: A research on developed and developing countries

With the developing financial markets and technological innovations, the types and uses of financial instruments continue to develop. Credit default swaps emerged as an important tool that provides protection against credit risk as a result of these developments. Credit default swaps are one of the most basic credit derivative instruments and provide insurance to the buyer in case the underlying asset defaults. In addition, credit default swaps (CDS) are used as an indicator of credit risk and high CDS premiums bring high risks. For this reason, the costs that companies and countries that are considered risky will face for the funds they will obtain will increase. In this case, increased risks can prevent potential investments. The aim of the study is to determine the effect of CDS premiums on stock market indices. In this context, the relationship between CDS premiums and stock market indices of 9 developed and 10 developing countries was analyzed. In addition, the effect of Turkey CDS premiums on BIST indices was investigated. In this direction, panel data analysis was used to determine the relationship between CDS premiums and developed and developing countries. In order to determine the relationship between CDS premiums and BIST indices, ARDL bounds test, which is a time series analysis, was used. The time for the data set covered in the study covers the years 2008-2021. As a result; It has been determined that stock market indices of developed and developing countries are affected by CDS premiums. It has been determined that the increases in CDS premiums decrease the stock market indices, that is, there is an inverse and statistically significant relationship between them. As a result of the analysis examining the relationship between CDS premiums and BIST indices, which is another research subject, it has been revealed that 7 of the 21 indices are sensitive to the changes in CDS premiums and there is a negative and significant relationship between them.