Econometric Analysis of the Relationship Between CDS Premiums and Gold and Foreign Exchange Rates for the Turkish Economy

Abstract

Purpose - This study aims to analyse the relationship between CDS (Credit Default Swap) premiums and gold and exchange rates for the Turkish economy using an econometric approach. CDS premiums are considered as an indicator of a country's debt repayment risk and increase when economic uncertainties are high. Gold and exchange rates, on the other hand, can appreciate significantly during economic crises and financial uncertainties as investors seek safe havens. Design/methodology/approach – Time series are utilised in the study. Augmented Dickey-Fuller (ADF) test and Phillips-Perron (PP) test were used to determine the stationarity levels of the series. Toda-Yamamoto test is used to test whether there is any causality relationship between the variables. Toda-Yamamoto causality test provides accurate results even if the series are non-stationary because the test eliminates the need to take difference at the level of the series. Findings – The test results suggest that the interaction between exchange rates and CDS premiums is critical for risk perceptions and market behaviour in emerging economies such as Turkey. In particular, the causality relationship between the USD/TL exchange rate and CDS premiums reveals that Turkey's debt repayment risk and exchange rate movements are strongly linked, emphasising the vulnerability of the economy to external shocks. However, the lack of a significant relationship between CDS premiums and gold prices suggests that different economic dynamics shape both variables and do not interact with each other. Discussion – The study’s findings reveal that exchange rate changes and fluctuations in CDS premiums are important factors affecting Turkey's financial stability. Each variable constitutes an independent chain of economic indicators. These results provide important guidance for policymakers and investors in developing economic strategies.