Vol. 9 No. 2 (2021): Business & Management Studies: An International Journal

How the macroeconomic conditions and the global risk factors affect sovereign CDS spreads? New Evidence from Turkey

Sinem Pınar Gürel
Asst. Prof., Pamukkale University

Published 2021-06-25


  • CDS Spreads, Macroeconomic Factors, Structural VAR
  • Ülke kredi risk primi, Makroekonomik Faktörler, Yapısal VAR

How to Cite

Gürel, S. P. (2021). How the macroeconomic conditions and the global risk factors affect sovereign CDS spreads? New Evidence from Turkey. Business &Amp; Management Studies: An International Journal, 9(2), 547–560. https://doi.org/10.15295/bmij.v9i2.1800


This paper aims to investigate the effects of a set of major country-specific macroeconomic variables and global risk factor on determining Turkey’s sovereign CDS spreads. The industrial production index, consumer price index, nominal exchange rates, policy interest rate, stock market index, and the volatility index as a proxy for global risk appetite are used by employing SVAR methodology with block exogeneity for 2011M01-2020M09 periods. The results reveal that the country's nominal exchange rate is the main driver of sovereign CDS spread. Especially in 2018, the most significant source of the high increase in sovereign CDS spreads is the exchange rates. According to the impulse response functions, to reduce the sovereign CDS spread, economic growth is more effective than the stock market return. Moreover, it is seen that the global risk factor does not play an essential role in the increases in domestic country's sovereign CDS spread.


Download data is not yet available.


  1. Aizenman, J., Jinjarak, Y., & Park, D. (2013). Fundamentals and Sovereign Risk of Emerging Markets. National Bureau of Economic Research, Working Paper 18963. http://dx.doi.org/10.3386/w18963
  2. Aizenman, J., M. Hutchison., & Jinjarak, Y. (2013). What is the risk of European sovereign debt defaults? Fiscal space, CDS spreads and market pricing of risk, Journal of International Money and Finance, 34, 37–59. https://doi.org/10.1016/j.jimonfin.2012.11.011
  3. Akyüz, G., & Bekar, S.A. (2021). The Relationship Between Credit Default Swap and Macroeconomic Indicators: An Example from Turkey. Grima, S., Özen, E. and Boz, H. (Ed.) Contemporary Issues in Social Science (Contemporary Studies in Economic and Financial Analysis, Vol. 106), Emerald Publishing Limited, Bingley, pp. 165-177. https://doi.org/10.1108/S1569-375920210000106011.
  4. Alexander, C., & Kaeck, A. (2008). Regime dependent determinants of credit default swap spreads, Journal of Banking and Finance, 32 (6), 1008-1021. doi:10.1016/j.jbankfin.2007.08.002
  5. Atil, Ahmed., Bradford, M., Elmarzougui, A., & Lahiani, A. (2016). Conditional dependence of U.S and EU sovereign CDS: A time-varying copula- based estimation. Finance Research Letters, 19, 42-53. https://doi.org/10.1016/j.frl.2016.06.001
  6. Augustin, P., & Tedongap, R. (2016). Real economic shocks and sovereign credit risk, Journal of Financial and Quantitative Analysis 51(02), 541–587. doi: 10.1017/S0022109016000259
  7. Augustin, P. (2018). The term structure of CDS spreads and sovereign credit risk. Journal of Monetary Economics, 96, 53-76. https://doi.org/10.1016/j.jmoneco.2018.04.001
  8. Baldacci, E., S. Gupta., & Mati, A. (2011). Political and fiscal risk determinants of sovereign spreads in emerging markets, Review of Development Economics, 15(2), 251–263. doi: 10.1111/j.14679361.2011.00606.x
  9. Başarır, Ç., & Keten, M. (2016). A cointegration analysisi between CDS Premiums, stock ındexes and exchange rates in Emerging countries. Journal of Social Sciences of Mehmet Akif Ersoy University, 8(15), 369-380. https://doi.org/10.20875/sb.72076
  10. Bostanci, G., &Yılmaz, K. (2020). How connected is the global sovereign credit risk network?. Journal of Banking and Finance, 113, 105761, 1-19. https://doi.org/10.1016/j.jbankfin.2020.105761.
  11. Bouri, E., Boyrie, M.E., & Pavlova, I. (2017). Volatility transmission from commodity markets to sovereign CDS spreads in emerging and frontier countries. International Review of Financial Analysis, 49, 155-165, https://doi.org/10.1016/j.irfa.2016.11.001.
  12. Can, U., Bocuoğlu, M.E., & Can, G. Z. (2020). How does the monetary transmission mechanism work? Evidence from Turkey?. Borsa İstanbul Review, 20(4), 375-382. Doi: /10.1016/j.bir2020.05.004.
  13. Cao, C., Yu, F., & Zhong, Z. (2010). The information concept of option-implied volatility for credit default swap. Journal of Financial Markets, 13 (3), 321-343. https://doi.org/10.1016/j.finmar.2010.01.002.
  14. Carr, P., & Wu, L. (2007). Theory and evidence on the dynamic interactions between sovereign credit default swaps and currency options. Journal of Banking and Finance, 31(8), 2383–2403. doi:10.1016/j.jbankfin.2006.09.008
  15. Chan-Lau, J. (2006). Market-Based Estimation of Default Probabilities and Its Application to Financial Market Surveillance. IMF Working Papers 06/104. International Monetary Fund http://EconPapers.repec.org/RePEc:imf:imfwpa:06/104
  16. Ciarlone, A., Piselli, P., & Trebeschi, G. (2009). Emerging markets’ spreads and global financial conditions. Journal of International Financial Markets, Institutions and Money, 19 (2), 222-239, https://doi.org/10.1016/j.intfin.2007.11.003.
  17. Cihangir, K, Ç. (2020). Volatility Spillover Effects From Global and National Variables to Soveregin CDS Spreads: Evidence From Turkey. Visionary Journal, 11(26), 45-61. Doi: 10.21076/vizyoner.654420.
  18. Connor, G. (1984). A unified beta pricing theory, Journal of Economic Theory, vol: 34, No: 1, pp: 13-31. https://doi.org/10.1016/0022-0531(84)90159-5
  19. Cremers, M., Driessen, J., Maenhout, P., & Weinbaum, D. (2008). Individual stock-option prices and credit spreads. Journal of Banking and Finance, 32, 2706–2715. doi:10.1016/j.jbankfin.2008.07.005.
  20. Cushman, D.O., & Zha, T. (1997). Identifying monetary policy in a small open economy under flexible exchange rates, Journal of Monetary Economics, Vol (39), pp: 433-448. Doi:0304-3932/977.
  21. Dickey, D. A., & Fuller, W. A. (1979). Distribution of the estimators for autoregressive time series with a unit root. Journal of the American Statistical Association, 74 (366a), 427-431. https://doi.org/10.2307/2286348
  22. Dieckmann, P., & Plank, T. (2012).Default Risk of Advanced Economies: An Empirical Analysis of Credit Default Swaps during the Financial Crisis. Review of Finance, 16(4),903–934, https://doi.org/10.1093/rof/rfr015
  23. Doshi, H., Jacobs, K., & Zurita, V. (2017). Economic and Financial Determinants of Credit Risk Premiums in the Sovereign CDS Market. The Review of Asset Pricing Studies, 7(1), 43–80. https://doi.org/10.1093/rapstu/rax009
  24. Edwards, S. (1984). LDC foreign borrowing and default risk: an empirical investigation, 1976–80. The American Economic Review, 74 (4), 726–734. Stable URL: http://www.jstor.com/stable/1805136
  25. Fontana, A., & Scheicher, M. (2010). An analysis of euro area sovereign CDS and their relation with government bonds, European Central Bank Working Paper Series, No: 1271, ISSN 1725-2806 (online)
  26. Gadanecz, B., Miyajima, K., & Shu, C. (2018). Emerging market local currency sovereign bond yields: The role of exchange rate risk. International Review of Economics and Finance, 57, 371-401. https://doi.org/10.1016/j.iref.2018.02.004
  27. Galil, K., & Soffer, G. (2011). Good news, bad news and rating announcements: An empirical investigation. Journal of Banking and Finance, 35 (11), 3101-3119. doi: 10.1016/j.jbankfin.2011.04.010.
  28. Galil, K., Shapir, O.M., Amiram, D., & Ben-Zion, U. (2014). The determinants of CDS spreads. Journal of Banking and Finance, 41, 271–282. https://doi.org/10.1016/j.jbankfin.2013.12.005
  29. Gebeşoğlu, F., & Varlık, N. (2018). The Macroeconomic Effects of sovereign risk Premium shock: A case study for Turkey. Journal of Management and Economic Research, 16(2), 236-246. doi.org/10.11611/yead.420440
  30. Hassan, M. K., Kayhan, S., & Bayat, T. (2017). Does credit default swap spread affect the value of the Turkish Lira against the U.S. dollar?. Borsa Istanbul Review, 17(1), 1-9. http://dx.doi.org/10.1016/j.bir.2016.10.002
  31. Hibbert, A.M., & Pavlova, I. (2017). The drivers of Sovereign CDS Spread Changes: Local Versus Global Factors, The Financial Review 52 (3), 435-457. https://doi.org/10.1111/fire.12140
  32. Ho, H.S. (2016). Long and short runs determinants of the sovereign CDS spread in emerging countries, Research in International Business and Finance, 36, 579-590. doi.org/10.1016/j.ribaf.2015.07.001
  33. Huberman, G. (1982). Arbitrage pricing theory: A simple approach. Journal of Economic Theory, Vol: 28, No: 1, pp: 183-198. https://doi.org/10.1016/0022-0531(82)90098-9.
  34. Hui, C. -H., & Chung, T. K. (2011). Crash risk of the euro in the sovereign debt crisis of 2009–2010. Journal of Banking & Finance, 35 (11), 2945–2955. https://doi.org/10.1016/j.jbankfin.2011.03.020
  35. Hui, C., & Fong, P-W, T. (2015). Price cointegration between sovereign CDS and currency option markets in the financial crises of 2007-2013. International Review of Economics and Finance, 40, 174-190. https://doi.org/10.1016/j.iref.2015.02.011
  36. Jarrow, R., & Turnbull, S. (1995). Pricing derivatives on financial securities subject to credit risk. The Journal of Finance, 50 (1), 53-85. https://doi.org/10.1111/j.1540-6261.1995.tb05167.x
  37. Kajurova, V. (2015). The Determinants of CDS Spreads: The Case of UK Companies, Procedia Economics and Finance, 23, 1302-1307, https://doi.org/10.1016/S2212-5671(15)00433-5.
  38. Kargı, B. (2014). Credit default swap spreads: The analysis of time series for the interaction with the interest rates and the growth in Turksh economy, Montenegrin Journal of Economics, 10 (1), 59-66. doi: 10.2139/ssrn.2467546
  39. Kilci, E.N. (2017). An Assessment of the relationship between CDS Spreads and Sovereign Credit Risk; Turkey Case, Maliye ve Finans Yazıları, 118, 71-85. https://doi.org/10.33203/mfy.357664
  40. Kocsis, Z., & Monostori, Z. (2016). The role of country-specific Fundamentals in sovereign CDS spreads: Eastern European experiences. Emerging Markets Review, 27, 140-168. http://dx.doi.org/10.1016/j.ememar.2016.05.003
  41. Liu, Y., & Morley, B. (2012). Sovereign credit default swaps and the macroeconomy. Applied Economics Letters, 19(2), 129-132. doi: 10.1080/13504851.2011.568390
  42. Longstaff, F.A., Pan, J., Pedersen, L.H., & Singleton, K.J. (2011). How sovereign is sovereign credit risk?. American Economic Journal: Macroeconomics, 3 (2), 75–103. doi:10.1257/mac.3.2.75
  43. Merton, R. C. (1974). On the pricing of corporate debt: The risk structure of interest rates. The Journal of Finance ,29 (2), 449–470. https://doi.org/10.1111/j.1540-6261.1974.tb03058.x
  44. Münyas, T. (20209. Evaluation of The relationship Between credit Default Swaps and EURO and Dollar Exchange Rates: The Case of Turkey. Business & Management Studies: An International Journal, 8(2), 1113-1130. https://doi.org/10.15295/bmij.v8i2.1439.
  45. Ngene, G. M., Hassan, M. K.., & Alam, N. (2014). Price discovery process in the emerging sovereign CDS and equity markets. Emerging Markets Review, 21, 117–132. doi: 10.1016/j.ememar.2014.08.004
  46. Norden, L., & Weber, M. (2004). Informational efficiency of credit default swap and stock markets: The impact of credit rating announcements. Journal of Banking and Finance, 28 (11), 2813–2843. https://doi.org/10.1016/j.jbankfin.2004.06.011
  47. Pan, S., & Singleton, K. J. (2008). Default and recovery implicit in the term structure of sovereign CDS spreads, The Journal of Finance, 63 (5), 2345-2384. https://doi.org/10.1111/j.1540-6261.2008.01399.x
  48. Phillips, C. B. P., & Perron, P. (1988). Testing for a unit root in time series regression. Biometrika, 75 (2), 335-346.
  49. Polat, U. (2017). Regime switching determinants of sovereign CDS spred: Evidence from Turkey. Eurasian Journal of Economics and Finance, 5(4), 124-141.
  50. Ramos-Francia, M., & Rangel, J. (2012). Revisiting the effects of country specific fundamentals on sovereign default risk. Economics Bulletin, 32 (4), 3008–3016. Stable URL: http://www.accessecon.com/Pubs/EB/2012/Volume32/EB-12-V32-I4-P288.pdf
  51. Remolona, E.M., Scatigna, M., & Wu, E. (2008).The Dynamic Pricing of Sovereign Risk in Emerging Markets Fundamentals and Risk Aversion. The Journal of Fixed Income, 17 (4) 57-71; https://doi.org/10.3905/jfi.2008.705542.
  52. Ross, S. A. (1976). The arbitrage theory of capital asset pricing. Journal of Economic Theory, Vol:13, No:3, pp: 341-360. Doi: https://doi.org/10.1016/0022-0531(76)90046-6.
  53. Şahin, C. (2018). Does current account deficit influence CDS points? A perspective for Turkey?. Muhasebe ve Finansman Dergisi, 80, 189-206. https://doi.org/10.25095/mufad.465937
  54. Shear, F., & Butt A.H.(2017). Relationship between stock and the sovereign CDS markets: A Panel VAR Based Analysis. South Asian Journal of Management Sciences, Vol 11(1) 52-67, doi: 10.21621/sajms.2017111.04f
  55. Sovbetov, Y., & Saka, H. (2018). Does it take two to tango: Interaction between Credit Default Swaps and National Stock Indices. Journal of Economics and Financial Analysis, 2 (1), 129-149. Doi: 10.1991/jefa.v2i1.a15.
  56. Srivastava, S., Lin, H., Premachandra, I.M., & Roberts, H. (2016). Global risk spillover and the predictability of sovereign CDS spread: International evidence. International Review of Economics and Finance, 41, 371-390, https://doi.org/10.1016/j.iref.2015.10.047
  57. Sun, X., Wang, J.W., Yao, Y., Li, J., & Li, J. (2020) Spillovers among sovereign CDS, stock and commodity markets: A correlation network perspective. International Review of Financial Analysis, 68, 101271. https://doi.org/10.1016/j.irfa.2018.10.008
  58. Tabak, B. M., de Castro Miranda, R., & Silva Medeiros, M. (2016). Contagion in CDS, banking and equity markets. Economic Systems, 40 (1), 120–134. https://doi.org/10.1016/j.ecosys.2015.07.002
  59. Wang, A. T., Yang, S. Y., & Yang, N. T. (2013). Information Transmission between Sovereign Debt CDS and Other Financial Factors; The Case of Latin America”. The North American Journal of Economics and Finance, 26, 586-601. https://doi.org/10.1016/j.najef.2013.02.023
  60. Yildirim, M.O., & Yildirim, A.E. (2017). The influence of consumption and investment on unemployment in Turkey: A SVAR approach. Ekonomika, 96(1). https://doi.org/10.15388/Ekon.2017.1.10665
  61. Zivot, E. & Andrews, D. W. K. (1992). Further evidence on the Great Crash, the oil-pirice shock, and the unit root hypothesis. Journal of Business and Economic Statistics, 10 (3), 251-270. Doi: /10.2307/1291541.