Examination of Relationships Between Foreign Portfolio Investments and CDS Premium, Exchange Rate and Interest Rate in Turkey

Foreign capital inflows are important resources for national economies. In this regard, foreign portfolio investments contribute to the long-term development of the nation’s economy in addition to bolstering the expansion of the financial market in the investment nation. However, foreign investors also consider various systematic risks while making portfolio investments by spreading their risks in international markets. Therefore, determining the factors that have an impact on foreign portfolio investments is important for national economies aiming to increase foreign capital inflows. The purpose of this study is to examine the relationship between foreign portfolio investments and credit risk premium (Credit Default Swap, CDS), dollar exchange rate and interest rate in Turkey between 2007:Q4-2024:Q4 periods. Vector Autoregressive (VAR) analysis was used to analyse the dynamic relationships between variables in the study. According to the findings obtained from the causality test, CDS premium and interest rate returns can be used to explain foreign portfolio returns. According to the impulse-response graphs, it is observed that foreign portfolio returns respond negatively to shocks in CDS premium and dollar returns in the short run, while they respond positively to interest rate returns. It is expected that the study’s findings will give policymakers short-term insights into how to improve macroeconomic indicators and foreign capital inflows.