The impact of the four layers of uncertainty on Turkish CDS market
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Date
2023-09
Authors
Κυριαζόπουλος, Ιωάννης
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Abstract
This paper aims to explore how domestic and foreign sentiment indicators influence Credit Default Swaps (CDS), with a specific focus on the Turkish 5 Year CDS. To accomplish this, we employ two distinct Cholesky decomposition VAR models: one for domestic sentiments and another for foreign sentiments, using monthly data encompassing four layers of uncertainty indicators. These four components include geopolitical unrest (measured by the GPR index), policy uncertainty (captured by the EPU index), financial market fluctuations (represented by VIX and realized volatility of BIST 100), and turbulence in the real sector (gauged by Business and consumer confidence). Our findings reveal that the most significant impact on Turkish Credit Default Swaps undeniably originates from the volatility observed in both domestic and foreign stock markets. Additionally, we can affirm that while there are evidently more local-level indicators that influence Turkish CDS, the influence of international indicators appears notably stronger. Nevertheless, there is some conflicting evidence suggesting a positive effect of heightened local geopolitical risk on Turkish business sentiment and stock prices.
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Keywords
Credit default swaps, Turkish CDS, Sentiment indicators, Geopolitical risk, Policy uncertainty, Stock market volatility, Business confidence, Consumer confidence, Cholesky decomposition VAR model