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Analysis of Relations between CDS, Stock Market, and Exchange Rate: Evidence from Covid-19

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  • Erkan Ustaoğlu

Abstract

The aim of the study is to investigate the relationships between CDS, the BIST100 index, and the US Dollar/Turkish Lira (USD/TRY) exchange rate during the Covid-19 period. For this purpose, the study used the frequency domain causality test developed by Breitung and Candelon (2006). According to the results of the study, a bidirectional causal relationship was found between CDS and the BIST100 index. While this relationship took place in the short and medium term from CDS to BIST100 index, it was detected in the entire frequency range (in all periods) from BIST100 index to CDS. In other words, it can be stated that while the causality from CDS to BIST100 index is not permanent, causality from BIST100 index to CDS is permanent. Similarly, a bidirectional causality relationship was found between CDS and the USD/TRY exchange rate. While this relationship occurred in the short and medium term from CDS to USD/TRY exchange rate, it was detected in the entire frequency range (in all periods) from USD/TRY exchange rate to CDS. In other words, it can be stated that while the causality from CDS to USD/TRY exchange rate is not permanent, the causality from USD/TRY exchange rate to CDS is permanent.

Suggested Citation

  • Erkan Ustaoğlu, 2022. "Analysis of Relations between CDS, Stock Market, and Exchange Rate: Evidence from Covid-19," Journal of Research in Economics, Politics & Finance, Ersan ERSOY, vol. 7(2), pages 301-315.
    • Handle: RePEc:ahs:journl:v:7:y:2022:i:2:p:301-315
    DOI: 10.30784/epfad.1085420
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    References listed on IDEAS

    as
    1. I. Anagnostou & T. Squartini & D. Kandhai & D. Garlaschelli, 2021. "Uncovering the mesoscale structure of the credit default swap market to improve portfolio risk modelling," Quantitative Finance, Taylor & Francis Journals, vol. 21(9), pages 1501-1518, September.
    2. Apergis, Nicholas & Danuletiu, Dan & Xu, Bing, 2022. "CDS spreads and COVID-19 pandemic," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 76(C).
    3. Ioannis Anagnostou & Tiziano Squartini & Drona Kandhai & Diego Garlaschelli, 2020. "Uncovering the mesoscale structure of the credit default swap market to improve portfolio risk modelling," Papers 2006.03014, arXiv.org, revised Apr 2021.
    4. Breitung, Jorg & Candelon, Bertrand, 2006. "Testing for short- and long-run causality: A frequency-domain approach," Journal of Econometrics, Elsevier, vol. 132(2), pages 363-378, June.
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    More about this item

    Keywords

    CDS; BIST; USD/TRY Exchange Rate; Breitung and Candelon; Frequency Domain Causality;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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