Determinants of credit default swaps premium: Comparative analysis on developed and developing countries

Credit default swap (CDS) premium, which has gained importance since the global financial crisis, is frequently used in financial markets as a credit derivative and is accepted as credit risk indicator of countries. The thesis aims to determine the effect of macroeconomic and financial variables on CDS premiums in developed and developing countries. In the study in which the Driscoll-Kraay Standard Error Estimator of panel data econometrics was applied, the common determining factors of CDS premiums for developed and developing countries were defined as inflation, stock market index and growth rate. In addition to the common factors, unemployment rate and interest rate of government bonds in developed countries and current account deficit in developing countries were found to be statistically significant. According to the analysis results, the model explains the CDS premiums by 65% in developed countries, while it explains 30% in developing countries. This result indicates that the model is more appropriate for explaining risk status of developed countries, whereas the effect of macroeconomic and financial variables is limited in explaining the risk status of developing countries. In addition, it is observed that various country-specific factors such as political uncertainty and risk, apart from macroeconomic and financial variables, impact the determination of risk in developing countries.