Dynamic Interactions Between CDS Premiums, Exchange Rates, and the BIST Banking Index: Evidence from Turkey (2013–2023)
Dynamic Interactions Between CDS Premiums, Exchange Rates, and the BIST Banking Index: Evidence from Turkey (2013–2023)

Summary/Abstract: This study investigates the dynamic interrelationships among credit default swap (CDS) premiums, exchange rates, and the Borsa Istanbul (BIST) Banking Index in the context of the Turkish financial market over the period 2013–2023. Monthly data have been employed, and the analysis has been conducted using the timevarying parameter vector autoregressive (TVP-VAR) model, a framework well-suited for capturing evolving interactions and volatility spillovers over time. Empirical results indicate that fluctuations in exchange rates have exerted a significant influence on the volatility of both CDS premiums and the BIST Banking Index. Furthermore, substantial volatility transmission has been observed from CDS premiums to the BIST Banking Index, highlighting the sensitivity of banking sector equity performance to sovereign credit risk perceptions. It has also been identified that CDS premiums exhibited pronounced volatility prior to 2018, remained highly volatile between 2018 and 2022, and experienced renewed volatility post-2022. Similarly, the BIST Banking Index demonstrated persistent volatility from 2014 through the end of 2022, suggesting an extended period of market instability within Turkey's banking sector. These findings contribute to the broader understanding of systemic risk and financial interconnectivity in emerging markets. They may provide valuable insights for policymakers, institutional investors, risk management professionals, and financial analysts concerned with market stability and investment strategy. Understanding these interdependencies is essential for the formulation of effective hedging strategies, the pricing of financial instruments, and the assessment of macro-financial vulnerabilities in economies subject to external shocks and credit risk fluctuations.

• Details
• Contents