Credit default swap: Influencing factors and effects on foreign portfolio investment in Turkey

Risk is one of the most important factors for investors who are trading in financial markets. One of the risk factors in the globalizing world is country risk. With the feeling of country risk, it has started to work on financial instruments that aimed at measuring this risk and protecting from this risk. The credit default swap (CDS), which is included in the credit derivatives, is a financial derivative instrument resulting from this answer. The credit default swap is mainly aimed at ensuring protection from credit risk. With the increase and development of studies on credit default swap, it has started to be used as an indicator of country risk. In this study, the relationship between credit default swaps, which are used to measure country risk, and portfolio investments was examined for Turkey. Turkey's 5 year CDS premiums data are taken from Bloomberg terminal and portfolio investments data are taken from Central Bank of Turkey EVDS platform. ARDL (Autoregressive Distributed Lag) bound test, unit root and diagnostic tests were applied to the data, handled in a quarterly period between 2008 and 2020. In conclusion, both in the long and the short run, relationship was found between Turkey's 5 year CDS premiums and portfolio investments. In other words, it is concluded that short term shocks come to long equilibrium.