The determinants of Turkish CDS volatility: An ARDL approach covering COVID period

Abstract

The accuracy of CDS premiums has been questioned in many former studies. However, we intend to show that the volatilities of these spreads rather than their basis point levels indicate and signal the status of sovereign risk and credit worthiness as they tend to reveal sudden deteriorations in key sovereign and global economic indicators. In that respect we aim to reveal the determinants of Turkish CDS spread volatility by using an ARDL Bounds Test framework. In line with our expectations exchange rate, stock market indice and oil price volatility have significant positive coefficients in the long run whereas US 10-year bond spreads have short run effects up to three lags. Also, our results show that COVID pandemic has remarkably increased Turkish CDS volatility. Moreover, the unorthodox monetary policies adopted after COVID has also raised CDS volatility with persistently high spread levels where a long-term memory effect was prevalent.