The effect of change in credit default SWAP (CDS) premiums on foreign shares of stock market indexes: The case of Turkey

With the free movement of capital in the world, the financial sector has shown an important development, but this liberalization has caused exposure to various risks in the international area. Derivative products are frequently used to eliminate or minimize these emerging risks. Credit derivatives, one of the derivative products that allow the lender to transfer the credit risk of a debt instrument to a third party in return for a payment, are contracts used to manage risk effectively. Of these contracts, the most widely used credit default swaps (CDS) keep the risk exposure away from the buyer. In addition, CDS spreads are used to estimate expectations of a country's creditworthiness. In the study, it is aimed to determine the causality relationship between the five-year term CDS spreads of Turkey, which is one of the country risk indicators, and the foreign shares in the BIST 100, BIST Bank (XBANK), BIST Real Estate Investment Company (XGMYO), BIST Holding and Institutions (BISTHOLD), BIST Communication (BISTILTM), BIST Technology (XUTEK), BIST Financial (XZUMAL) and BIST Industrial (XUSIN) Indexes. For this purpose, weekly data from January 2012 to December 2021 were used in the study. In order to explain the causality relationship between the variables, VAR Granger Causality Test and impulse-response and variance decomposition analyzes were applied. As a result of the Granger causality test, while no causality relationship was detected between CDS variable and foreign share variables at XGMYO, XHOLD, XILTM, XUSIN indexes, it was revealed that there was a causal relationship between BIST 100, XBANK, XUTEK, XZUMAL indexes foreign share. As a result of impulse response analysis, it is seen that a shock in CDS caused a decrease in foreign shares in all mentioned indexes during a certain period. According to the variance decomposition, it was determined that a high weight of the foreign share change in the indexes as of the 12th week was caused by the CDS variable.