Dynamic link between central bank reserves, credit default swap spreads, and foreign exchange rates: Evidence from Turkey by time series econometrics

Abstract

In this study, dynamic links between central bank reserves (CBR), credit default swap (CDS) spreads, and foreign exchange (FX) rates are investigated. So, Turkey, which is a negative outlier country among other peer emerging countries, is examined by considering recent developments on these indicators. In doing so, the study covers relatively high frequency (i.e., weekly) data from January 2, 2004 to November 12, 2021, performs various econometric approaches as Wavelet Coherence (WC), Quantile-on-Quantile Regression (QQR), and Granger Causality in Quantiles (GCQ) as main models, and applies Toda-Yamamoto (TY) causality and Quantile Regression (QR) for the robustness. The results show that (i) there is a time-frequency dependency between the CBR, CDS spreads, and FX rates; (ii) a bidirectional link exists between the CBR and FX rates; between the FX rates and CDS spreads; and between the CDS spreads and CBR; (iii) the link exists in most quantiles except for some lower and middle quantiles for some indicators; (iv) explanatory effect of the indicators on each other varies based on quantiles; (v) the robustness of the results are validated by the TY causality test for the WC model and by the QR approach for the QQR model. The results suggest the significance of the CBR for the FX rates, the FX rates for the CDS spreads, and the CDS spreads for the CBR.