Multi-scale interactions between Turkish lira exchange rates and sovereign CDS in Europe and Asia

ABSTRACT

This article examined the multi-scale correlations between Turkish lira exchange rates and sovereign credit default swap (CDS) in Turkey, Europe, and Asia by implementing a combined quantile regression (QR) and wavelet approach. The results showed that a severe depreciation of the lira will increase the sovereign risk in Turkey at different time scales. In addition, the results revealed stronger and quicker responses from Asia’s sovereign CDS than Europe’s to the shocks of the lira, which provides important implications for Asian countries and especially Asian emerging markets to prevent external risk contagion and guide the domestic monetary policy.

KEYWORDS:

• Turkish lira exchange rates
• sovereign CDS
• wavelet decomposition
• granger causality test
• quantile regression

JEL CLASSIFICATION:

• F31
• C10

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ The highest approximation, S5, is the trend/smoothed component, while the detail signals D1, D2, D3, D4, and D5 are associated with oscillations of lengths 2–4, 4–8, 8–16, 16–32, and 32–64, respectively. We regard scales from D1 to D3 within half a month as short-term, D4 and D5 as medium-term, and S5 as long-term.

² Due to space constraints, Tables 3 and 4 just show the estimates of valuables of sovereign CDS and exchanges rates, without the estimates of control valuables. If the readers are interested in the complete results, please contact the author.

Additional information

Funding

This work was supported by the National Natural Science Foundation of China [71771206,71425002].