Journal of Economics and Financial Analysis, 2 (1), pp. 129-149, [2018]
URI: https://ojs.tripaledu.com/index.php/jefa/article/view/35/29

Does it take two to tango: Interaction between Credit Default Swaps and National Stock Indices




DOI: http://dx.doi.org/10.1991/jefa.v2i1.a15

Abstract

This paper investigates both short and long-run interaction between BIST-100 index and CDS prices over January 2008 to May 2015 using ARDL technique. The paper documents several findings. First, ARDL analysis shows that 1 TL increase in CDS shrinks BIST-100 index by 22.5 TL in short-run and 85.5 TL in long-run. Second, 1000 TL increase in BIST index price causes 25 TL and 44 TL reducation in Turkey's CDS prices in short- and long-run respectively. Third, a percentage increase in interest rate shrinks BIST index by 359 TL and a percentage increase in inflation rate scales CDS prices up to 13.34 TL both in long-run. In case of short-run, these impacts are limited with 231 TL and 5.73 TL respectively. Fourth, a kurush increase in TL/USD exchange rate leads 24.5 TL (short-run) and 78 TL (long-run) reductions in BIST, while it augments CDS prices by 2.5 TL (short-run) and 3 TL (long-run) respectively. Fifth, each negative political events decreases BIST by 237 TL in short-run and 538 TL in long-run, while it increases CDS prices by 33 TL in short-run and 89 TL in long-run. These findings imply the highly dollar indebted capital structure of Turkish firms, and overly sensitivity of financial markets to the uncertainties in political sphere. Finally, the paper provides evidence for that BIST and CDS with control variables drift too far apart, and converge to a long-run equilibrium at a moderate monthly speed.

Keywords

Credit Default Swaps (CDS); BIST-100 index; Cointegration; ARDL.

JEL Classification

E00, E44.

Full Text:


References

Blanco, R., Brennan, S., and Marsh, I. W. (2005). An empirical analysis of the dynamic relation between investment‐grade bonds and credit default swaps. The Journal of Finance, 60(5), 2255-2281.

Coronado, M., Corzo, M.T., and Lazcano, L. (2012). A case for Europe: the relationship between Sovereign CDS and stock indexes. Frontiers in Finance and Economics, 9(2), 32-63.

Estrella, A., and Hardouvelis, G.A. (1991). The term structure as a predictor of real economic activity. Journal of Finance 46 (2), 555–576.

Fama, E.F. (1984). The information in the term structure. Journal of Financial Economics, 17, 175–196.

Finnerty, J.D., Miller, C.D., and Chen, R.R. (2013). The impact of credit rating announcements on credit default swap spreads. Journal of Banking & Finance, 37(6), 2011-2030.

Fung, H.G., Sierra, G.E., Yau, J., and Zhang, G. (2008). Are the US stock market and credit default swap market related? Evidence from the CDX indices. Journal of Alternative Investments, Summer.

Galil, K., Shapir, O.M., Amiram, D., and Ben-Zion, U. (2014). The determinants of CDS spreads. Journal of Banking & Finance, 41, 271-282.

Granger, C.W.J. (1969). Investigating Causal Relations by Econometric Models and Cross-spectral Methods. Econometrica, 37(3), 424–438.

Hull, J., Predescu, M., and White, A. (2004). The relationship between credit default swap spreads, bond yields, and credit rating announcements. Journal of Banking & Finance, 28(11), 2789-2811.

Ismailescu, I., and Kazemi, H. (2010). The reaction of emerging market credit default swap spreads to sovereign credit rating changes. Journal of Banking & Finance, 34(12), 2861-2873.

Longstaff, F.A., Mithal, S., and Neis, E. (2003). The credit default swap market: is credit protection priced correctly. Working Paper. University of California. Los Angeles.

Narayan, P.K., Sharma, S.S., and Thuraisamy, K.S. (2014). An analysis of price discovery from panel data models of CDS and equity returns. Journal of Banking & Finance, 41, 167-177.

Norden, L., and Weber, M. (2004). Informational efficiency of credit default swap and stock markets: The impact of credit rating announcements. Journal of Banking & Finance, 28(11), 2813-2843.

Norden, L., and Weber, M. (2009). The co‐movement of credit default swap, bond and stock markets: An empirical analysis. European financial management, 15(3), 529-562.

Pesaran, M.H., Shin, Y., and Smith, R.J. (2001). Bounds Testing Approaches to the Analysis of Level Relationships. Journal of Applied Econometrics, 16(3), 289-326.

Trutwein, P., Ramchander, S., and Schiereck, D. (2011). Jumps in credit default swap spreads and stock returns. The Journal of Fixed Income, 20(3), 56-70.

Zhu, H. (2006). An empirical comparison of credit spreads between the bond market and the credit default swap market. Journal of Financial Services Research, 29(3), 211-235.




Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.