Chapter 11 The Relationship Between Credit Default Swap and Macroeconomic Indicators: An Example from Turkey

Introduction: The credit default swap (CDS) represents a country’s credit risk premium. CDS premium changes by being affected by several factors. These changes are followed by international investor for their investment decisions. CDS premium is important for country to determine the country default risk correctly. Purpose : In this study, the authors seek to examine the effects of macroeconomic indicators on the CDS premium, which is used as a measure of sovereign credit risk. Accordingly, in addition to the CDS premium, economic growth, the inflation rate, the interest rate, the real exchange rate, the net foreign debt rate, and the foreign trade deficit rate were employed to represent macroeconomic indicators. Methodology : The relationship between the given variables during the period spanning from 2009:I–2019:II in Turkey was analyzed with the help of the Dolado–Lütkepohl causality test and the autoregressive distributed lag method. Findings: The inflation rate, the real exchange rate, the interest rate, the net foreign debt rate, and the foreign trade deficit rate, which are among the macroeconomic variables (excluding economic growth), have a positive effect on the CDS premium in the short term as well as the long term. The effect of economic growth is negative. Additionally, from an economic standpoint, the coefficients of macroeconomic variables are in the expected direction. These findings verify the effects of macroeconomic indicators on the CDS premium.