Credit default swap premium's relation with foreign exchange rate and interest rate: An application in Turkey

There are multiple economic indicator which indicates countrys' financial status. The main indicators are GDP growth rate, unemployment rate, interest rate, inflation rate, current account deficit and budget deficit. The credit default swap, which initial purpose was to hedge risk, over time became one of the economic indicators mentioned above. The most important factor that prepares the ground for this situation is; credit default swap premium is based on the borrower's repayment risk when determining the market and as a result of this, the calculated premium becomes an important source of information for the other investors in showing the borrower's financial position. In this study, in the process which mentioned above, relationship between credit default swap premia, which becomes one of the most important indicators, with interest rate and exchange rate is examined and analysed under the perspective of Turkey. Granger Causality Test was conducted to investigate the relationship between Credit Default Swap premium with interest rate and exchange rate and all three variables were determined as a Granger Causes of each other.