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How Vulnerable is the Turkish Stock Market to the Credit Default Swap? Evidence from the Markov Switching GARCH Model

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  • Veysel Karagol

    (Van Yuzuncu Yil University, Ercis Faculty of Business Administration, Department of Economics, Van, Turkiye)

Abstract

This study aims to investigate the effect of the credit default swap (CDS) on the Turkish stock market. More specifically, it analyses whether the relationship between CDS and the Turkish stock market has changed during the period of unprecedented stock returns in 2022. The Markov Switching GARCH method is preferred because of its many advantages in the analysis of the return series of the variables. Two different models are estimated for the full sample weekly period of 2010:01-10/2022:12-11 and the subsample weekly period of 2010:01-10/2021:12-05. The subsample period is more optimal than the full sample period. Nevertheless, the findings of both sample periods are included to make a comparison. The effect of CDS on the Turkish stock market is greater in the high-volatility regime than in the lowvolatility regime. CDS has a negative impact on the Turkish stock market in both low and high volatility periods. The most striking finding is that CDS affects the Turkish stock market approximately twice as much in the subsample period as in the full sample period in both regimes. Policymakers should follow risk-oriented policies instead of policies against the wind against the risk of a possible boom in financial markets.

Suggested Citation

  • Veysel Karagol, 2023. "How Vulnerable is the Turkish Stock Market to the Credit Default Swap? Evidence from the Markov Switching GARCH Model," Istanbul Journal of Economics-Istanbul Iktisat Dergisi, Istanbul University, Faculty of Economics, vol. 73(73-1), pages 513-531, June.
    • Handle: RePEc:ist:journl:v:73:y:2023:i:1:p:513-531
    DOI: 10.26650/ISTJECON2022-1223833
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    References listed on IDEAS

    as
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    3. Laura Ballester & Ana Mónica Escrivá & Ana González-Urteaga, 2021. "The Nexus between Sovereign CDS and Stock Market Volatility: New Evidence," Mathematics, MDPI, vol. 9(11), pages 1-23, May.
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    More about this item

    Keywords

    Credit default swap; Turkish stock market; Markov Switching GARCH JEL Classification : C58 ; E44 ; G24;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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