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A Study on the Relationship between CDS Premiums and Stock Market Indices: A Case of the Fragile Five Countries

Author

Listed:
  • Nuri Avsarligil

    (Akdeniz University, The Faculty of Applied Sciences / The Department of Finance and Banking, Antalya, Turkey)

  • Emre Turgut

    (Akdeniz University, The Institute of Social Sciences, The Department of Finance and Banking, Antalya, Turkey)

Abstract

International investors should have a pioneering knowledge of the country’s risk level before investing their savings in a country. For this purpose, Credit Default Swap (CDS) Agreements that serve as insurance against investor’s risk of not collecting their receivables have been developed. These contract premiums are called CDS premiums. The relationship between the Fragile Five countries’ CDS premiums and the stock market index prices has been examined by various researchers. The present study is unique because it is one of the pioneering studies examining the relationship between the CDS premiums of the Fragile Five countries and their Stock Market Indices. First, augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) unit root tests were performed for this purpose. Then, the Granger Causality test, Johansen Cointegration, and Pearson Correlation analyses were conducted to reveal the relationship between two variables. The results obtained in the study indicated that for India and Turkey, among the Fragile Five, there was a causality relationship between the stock market indices and the CDS premiums, a short-term relationship. In addition, there was a long-term cointegration relationship between the CDS premiums and the stock market indices of Turkey.

Suggested Citation

  • Nuri Avsarligil & Emre Turgut, 2021. "A Study on the Relationship between CDS Premiums and Stock Market Indices: A Case of the Fragile Five Countries," Istanbul Business Research, Istanbul University Business School, vol. 50(2), pages 275-301, November.
    • Handle: RePEc:ist:ibsibr:v:50:y:2021:i:2:p:275-301
    DOI: 10.26650/ibr.2021.50.808240
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    References listed on IDEAS

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    1. Yhlas Sovbetov & Hami Saka, 2018. "Does it take two to tango: Interaction between Credit Default Swaps and National Stock Indices," Journal of Economics and Financial Analysis, Tripal Publishing House, vol. 2(1), pages 129-149.
    2. Lars Norden & Martin Weber, 2009. "The Co†movement of Credit Default Swap, Bond and Stock Markets: an Empirical Analysis," European Financial Management, European Financial Management Association, vol. 15(3), pages 529-562, June.
    3. Asandului, Mircea & Lupu, Dan & Mursa, Gabriel Claudiu & Muşetescu, Radu, 2015. "Dynamic relations between CDS and stock markets in Eastern European countries," MPRA Paper 95506, University Library of Munich, Germany.
    4. Sinan Esen & Feyyaz Zeren & Halil Şimdi, 2015. "CDS and Stock Market: Panel Evidence Under Cross-Section Dependency," South-Eastern Europe Journal of Economics, Association of Economic Universities of South and Eastern Europe and the Black Sea Region, vol. 13(1), pages 31-46.
    5. José Da Fonseca & Katrin Gottschalk, 2020. "The Co‐Movement of Credit Default Swap Spreads, Equity Returns and Volatility: Evidence from Asia‐Pacific Markets," International Review of Finance, International Review of Finance Ltd., vol. 20(3), pages 551-579, September.
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