The relationship between credit default swaps and stock market index: A study on Turkish market

In this study, the lead-lag relationship between the credit default swap spreads and stock market index in Turkey is investigated. Within the scope of the study, weekly BIST100 stock index and 5-year credit default swaps are used between January 2010 and December 2019. Firstly, the long term relationship between the variables is analysed by Johansen co-integration test in the study and it is determined that there is no co-integration between the variables. Afterwards, a one-way causality from the stock market index to the credit default swap spread is detected by the Granger causality test. According to the variance decomposition analysis results obtained by the Vector Autoregressive Model, which is used to determine the degree of relationship between the variables, the stock market index has the power to explain the shocks on the credit default swap spreads by approximately 38%. According to the impulse-response findings, the response of the variables against the shocks given to the variables is positive in the first period while this reaction decreases and turns to negative in the second period and then it disappears at the end of the third period. The main result of the study is that changes in the stock market prices, which is the leading market, can be used to predict the changes in the credit default swap spreads.