The effect of credit default swap premiums on developing markets’ economies: The case of exchange rates

Abstract

In the literature of economics, risk perception is an important issue and it is some hard to measure. In this study, we test the relationship between CDS premiums as a variable indicating risk perception in ‘fragile five’ economies and nominal exchange rates of each ‘fragile five’ economy after the global crisis. The possible interaction between variables would make possible to predict exchange rates change in the future. Results obtained from both time series co-integration tests and panel data co-integration tests indicate that CDS premiums are one of the most important factor affecting nominal exchange rates in fragile five countries and it is concluded that the causation linkage between CDS premiums and exchange rate for Turkish, Brazilian, South African, Indonesian and Indian national currencies is valid in the longer time periods.

Keywords

• CDS premiums
• fragile five
• DOLS
• FMOLS