Macroeconomic and financial dynamics affecting CDS risk premium in Turkey: A structural breaks and cointegration approach

In this study, the relationships between Turkey's Credit Default Swap (CDS) risk premium and macroeconomic variables (external debt, current account deficit, CPI, central bank reserves) as well as financial variables (BIST100 index, 2-year benchmark interest rate, USD exchange rate) were analyzed for the periods 2007 and 2005 The analysis employed structural break unit root tests, the Arai-Kurozumi cointegration test, FMOLS and DOLS cointegration estimators, and the Hatemi-J asymmetric causality test to examine both short- and long-term effects. According to the results, increases in external debt, CPI, and current account deficit lead to higher CDS premiums, while increases in central bank reserves decrease the CDS premium. A 1% increase in external debt raises the CDS premium by 1,7%, and similarly, a 1-unit increase in CPI increases the CDS premium by 1,7%, while an increase in the current account deficit results in a 0,042-unit increase in the CDS premium. On the other hand, a 1% increase in central bank reserves reduces the CDS premium by 0,98%. While the BIST100 index does not have a statistically significant long-term effect on the CDS premium, short-term negative shocks adversely affect it. A 1% increase in interest rates and exchange rates raises the CDS premium by 0,3% and 0,4%, respectively. These findings highlight the significant impact of macroeconomic indicators such as external debt and CPI on Turkey's CDS risk premium. The increase in central bank reserves stands out as an important factor in reducing the country's risk perception. Therefore, it is essential for policymakers to develop strategies aimed at increasing savings rates to achieve lower financing costs, implement appropriate monetary policies to control inflation, and strengthen central bank reserves. By doing so, it will be possible to reduce Turkey's international borrowing costs and CDS risk premium. Interest rate and exchange rate policies aimed at inflation targeting also affect the CDS risk premium, making it possible to reduce the country's risk perception through appropriate monetary policy implementations. This study aims to provide guidance on the proper policy implementations by analyzing the dynamic relationships between the macroeconomic and financial factors that affect Turkey's CDS risk premium.