Nexus between credit default swap spreads and foreign exchange rates: evidence from BRICST, E7, MINT and Fragile Five countries

Abstract

The study investigates the nexus between credit default swap (CDS) spreads and foreign exchange (FX) rates in leading emerging countries, most of which CDS spreads are high and volatile. In this context, six leading emerging countries are included, daily data between October 8, 2004 and July 23, 2021 is used, nonlinear econometric models such as wavelet coherence (WC), Granger causality in quantiles (GCQ), and quantile-on-quantile regression (QQR) approaches are applied, and quantile regression (QR) is performed for robustness checks. The WC results show that there is bidirectional nexus between the CDS spreads and the FX rates. While the CDS spreads drive the FX rates until 2012, the FX rates drive the CDS spreads after this date. Also, the GCQ and QQR outcomes present that the nexus exists in almost all quantiles excluding middle quantiles (0.35, 0.40, 0.45, 0.50) and the highest quantile (0.95) for some countries whereas country-based results change.