[Paper Review] Does it take two to tango: Interaction between Credit Default Swaps and National Stock Indices

Yhlas Sovbetov, Hami Saka|ArXiv.org|Dec 1, 2025

Credit Risk and Financial Regulations13 citations

TL;DR

The paper analyzes short- and long-run interactions between the BIST-100 index and CDS prices (2008–2015) using ARDL, identifying bidirectional effects and market sensitivities to macro and political factors.

ABSTRACT

This paper investigates both short and long-run interaction between BIST-100 index and CDS prices over January 2008 to May 2015 using ARDL technique. The paper documents several findings. First, ARDL analysis shows that 1 TL increase in CDS shrinks BIST-100 index by 22.5 TL in short-run and 85.5 TL in long-run. Second, 1000 TL increase in BIST index price causes 25 TL and 44 TL reducation in Turkey's CDS prices in short- and long-run respectively. Third, a percentage increase in interest rate shrinks BIST index by 359 TL and a percentage increase in inflation rate scales CDS prices up to 13.34 TL both in long-run. In case of short-run, these impacts are limited with 231 TL and 5.73 TL respectively. Fourth, a kurush increase in TL/USD exchange rate leads 24.5 TL (short-run) and 78 TL (long-run) reductions in BIST, while it augments CDS prices by 2.5 TL (short-run) and 3 TL (long-run) respectively. Fifth, each negative political events decreases BIST by 237 TL in short-run and 538 TL in long-run, while it increases CDS prices by 33 TL in short-run and 89 TL in long-run. These findings imply the highly dollar indebted capital structure of Turkish firms, and overly sensitivity of financial markets to the uncertainties in political sphere. Finally, the paper provides evidence for that BIST and CDS with control variables drift too far apart, and converge to a long-run equilibrium at a moderate monthly speed.

Motivation & Objective

• Investigate short- and long-run dynamic interactions between the BIST-100 stock index and Credit Default Swap (CDS) prices.
• Quantify how changes in CDS influence stock index levels and vice versa.
• Assess the roles of interest rate, inflation, exchange rate, and political events in shaping CDS and stock index dynamics.
• Provide evidence on convergence or divergence behavior between BIST and CDS over time.

Proposed method

• Apply autoregressive distributed lag (ARDL) technique to monthly data from January 2008 to May 2015.
• Estimate short- and long-run elasticities of BIST-100 with respect to CDS prices and macro variables.
• Control for interest rate, inflation, TL/USD exchange rate, and political event indicators in the ARDL framework.
• Interpret the direction and magnitude of causal/linkage relationships between stock indices and CDS prices.

Experimental results

Research questions

• RQ1 What are the short-run and long-run effects of CDS price changes on the BIST-100 index?
• RQ2 What are the short-run and long-run effects of BIST-100 index movements on CDS prices?
• RQ3 How do macro variables (interest rate, inflation) and currency movements influence the CDS and BIST dynamics?
• RQ4 Do BIST-100 and CDS prices converge to a long-run equilibrium, and at what speed?
• RQ5 How do negative political events affect the dynamics between BIST-100 and CDS prices?

Key findings

• A 1 TL rise in CDS reduces BIST-100 by 22.5 TL in the short run and 85.5 TL in the long run.
• A 1000 TL increase in BIST price lowers CDS by 25 TL in the short run and 44 TL in the long run.
• A percentage rise in interest rate lowers BIST by 359 TL and raises CDS by 13.34 TL in the long run (and smaller effects in the short run).
• A kurush increase in TL/USD lowers BIST by 24.5 TL (short run) and 78 TL (long run) and increases CDS by 2.5 TL (short run) and 3 TL (long run).
• Negative political events reduce BIST by 237 TL (short run) and 538 TL (long run) but raise CDS by 33 TL (short run) and 89 TL (long run).
• Evidence suggests BIST and CDS with controls drift apart and converge to a long-run equilibrium at a moderate monthly speed.