A DYNAMIC CONNECTEDNESS ANALYSIS OF TURKIYE’S CDS PREMIUM, BIST BANKING, AND BIST INDUSTRIAL INDICES

Abstract

This paper explores the time-varying connectedness among credit default swap (CDS) premiums, the banking sector, and the industrial sector in Türkiye within a time-varying parameter vector autoregression (TVP-VAR) framework. Given that interactions between financial markets and the real sector evolve over time, a dynamic approach is essential to capture the changing nature of these relationships. Accordingly, the study analyzes shock transmission mechanisms through total and directional connectedness measures. The empirical findings reveal a strong and time-varying interaction structure among the variables. Descriptive statistics indicate that even after taking logarithmic differences, the series do not satisfy the normality assumption and exhibit high volatility, skewness, and fat-tailed characteristics. The results of the total connectedness index show that the level of interaction within the system increases significantly, particularly during periods of global and regional uncertainty. This suggests that financial shocks are transmitted more rapidly and intensively during crisis periods.The net spillover results indicate that CDS and the banking sector act as net transmitters of shocks in certain periods, whereas the industrial sector predominantly behaves as a net receiver. Pairwise connectedness analysis further reveals that the banking sector has a stronger and more pronounced shock transmission mechanism toward the real sector. In contrast, CDS premiums function primarily as a guiding financial risk indicator within the system, with relatively limited direct spillover effects. Moreover, recent geopolitical developments and rising global uncertainty appear to have reinforced the degree of connectedness among the variables. Taken together, the findings highlight the existence of a strong, bidirectional, and time-varying interaction between financial and real sectors. These results emphasize the importance of considering sectoral interlinkages in policy design and underline the central role of the banking sector in the transmission of systemic risk. The study provides important implications for policymakers and investors aiming to enhance financial stability and manage risk effectively.