DETERMINANTS OF SOVEREIGN CREDIT DEFAULT SWAPS (CDS) SPREADS IN EMERGING COUNTRIES: EVIDENCE FROM TURKEY

Abstract

Turkey faces increasing CDS spreads recently. The level of CDS shows the riskiness of a country in terms of credit default, and the countries can’t have the expected foreign investment inflow high CDS, and uncertainties in the macroeconomic environment may increase with the shortage of foreign investments inflow. In this context, the economies need to determine the influential factors to decrease CDS spreads. Ten independent variables classified in global, macro, and market factors and monthly data between 2004/1 and 2019/12 are analyzed by applying principal component analysis, dynamic Markov Switching, ARDL, fully modified least square (FMOLS), and dynamic ordinary least square (DOLS) models. The results show that (i) market component has a greater effect than other components for all models which indicates that it is the most important variable for Turkey’s CDS spread; (ii) global and market components are positive and statistically significant for all static models; (iii) macro component is negative for all models.