EFFECT OF SOME MACROECONOMIC VARIABLES ON RISK PERCEPTION: THE TURKISH CASE

Abstract

Recently Turkish economy is classified ‘fragile five’ with Brazil, India, Indonesia and South Africa because of some structural deficiencies and imbalances in its macroeconomic variables. Turkey’s fragility can be observed or measured from some economic indicators and one of them is Credit Default Swap (CDS) spread. It represents default probability of Turkish economy and it’s affected by many macroeconomic indicators. This study examines the determinants of CDS spread by using time series analysis for the period of 2011-2017 monthly data. On that note the relationships between the variables were tested with Johansen cointegration test to determine relationship in the long run . After determining long term relationship between the variables, the VECM (Vector Error Correction) model in cointegration framework was estimated in order to determine short term relationship. Lastly Granger test under VECM was applied in order to establish the uni or bi-directional causality between variables. In this frame we conclude that there is granger causality which directed from Current Account to Foreign Exchange and Foreign Exchange to CDS spread like a knock on effect. Also according to cointegration coefficient there is positive relationship between Foreign Exchange and CDS spread but we couldn’t support statistically significant relationship between Current Account and CDS spread.