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This study aims to identify critical determinants of sovereign credit risk by examining the influence of oil prices, gold prices, geopolitical risk, market volatility, exchange rates, inflation and non-performing loans on Türkiye’s credit default swap (CDS) spreads. This analysis provides a comprehensive understanding of how economic uncertainty and political risk impact Türkiye’s financial stability, as reflected in its CDS market. This study investigates the importance of ex ante proxies in explaining changes in CDS spread by financial and economic indicators in Türkiye.

This research explores the connections between critical financial and economic indicators and the credit risk of Türkiye between 2009 and 2022 by using advanced econometric techniques such as ARDL bound tests, fully modified ordinary least squares (FMOLS), dynamic ordinary least squares (DOLS), Johansen co-integration tests and VECM Granger causality analyses.

ARDL bound test results reveal significant negative impacts of BIST and non-performing loans on CDS, and positive associations with inflation, VIX and geopolitical risk on CDSs. The short-term results show that BIST, INFL, NPL, USD, VIX and GPRT have negative coefficients. Johansen co-integration, FMOLS and DOLS results reinforce the ARDL findings. Moreover, BIST is a significant Granger cause of CDS.

This study is significant, as it jointly considers economic and political risk factors, thereby integrating multiple econometric models to provide more robust, meaningful and comparable results. By examining these factors together, the analysis offers a more comprehensive understanding of risk dynamics, yielding insights relevant to Türkiye. Although the findings are specific to Türkiye, they have broader implications, enriching the understanding of emerging economies. Türkiye’s status as a key representative of emerging markets strengthens the study’s value, as the results can serve as a reference point for other countries with similar economic structures. The importance of this study is also underscored by its potential to inform risk management strategies, guide policy decisions and offer insights to investors and financial analysts. By elucidating the intricate relationships among a broad spectrum of macroeconomic variables, this research contributes to a more comprehensive risk assessment framework. It equips stakeholders with a more informed perspective on the factors influencing credit risk in Türkiye’s economic landscape.

The purpose of this study is to examine the long- and short-term relationships between the BIST100, RSC index, the EURO/TRY exchange rate, bank loans provided to the private sector, imports and exports, and nonperforming loans (NPLs) with the autoregressive distributed lag (ARDL) bound, Johansen co-integration and vector error correction model (VECM) causality tests. Political developments, pandemics, conflicts between countries, trade chains and general economic and financial problems that have frequently occurred worldwide in recent years have significantly affected the Turkish economy as well as all other countries. Türkiye's economy is intricately linked with global financial markets, and understanding the dynamics between domestic macroeconomic variables and external financial indicators can provide insights into the country's economic resilience and vulnerabilities to external shocks.

Two distinct models are used in the analysis, with the Borsa Istanbul 100 (BIST100) Index and the Real Sector Confidence (RSC) Index serving as the dependent variables. This study examines the long- and short-term relationships between the BIST100, RSC index, the EURO/TRY exchange rate, bank loans provided to the private sector, imports and exports, and nonperforming loans (NPLs) with the ARDL bound, Johansen cointegration and VECM causality tests. The study uses monthly data spanning from December 31, 2002, to July 29, 2022, offering a comprehensive perspective on the dynamics of the Turkish economy.

The findings reveal significant long-run relationships between the BIST100 and the exchange rate, imports and exports. Short-run dynamics indicate the importance of changes in these variables, as well as NPLs and RSC, in affecting the BIST 100. The model captures the impact of economic indicators such as imports, NPLs and exports on RSC. In addition, it underscores a long-run equilibrium relationship, suggesting a responsive RSC to deviations. There is a strong positive relationship between BIST100 and the RSC. Causality tests reveal temporal relationships and causal links, with evidence of bidirectional causality for some variables, providing comprehensive insights into the short-term dynamics and adjustment mechanisms influencing RSC in the Turkish economic context.

Amidst global economic uncertainties and fluctuations, particularly in emerging markets such as Türkiye, understanding the relationships between financial market indicators and macroeconomic variables may help policymakers formulate effective monetary and fiscal policies aimed at stabilizing the economy, promoting sustainable growth and mitigating financial risks. In addition, these insights have practical implications for investors, regulators and other financial market participants seeking to make informed decisions in an increasingly interconnected and dynamic global economy.

This study uniquely examines a wide range of macroeconomic variables and financial indicators specific to Türkiye, including both traditional and nontraditional factors. This study also offers unprecedented insights into the unique characteristics and dynamics of the Turkish economy and provides valuable insights for businesses, investors and policymakers to consider Türkiye’s economic environment more effectively.