EXCHANGE TRADED FUND RESPONSES TO CREDIT DEFAULT SWAP PREMIUM CHANGES: THE CASE OF FRAGILE FIVE COUNTRIES

Abstract

The study investigates the responses of iShares MSCI ETF (Morgan Stanley Capital International Exchange Traded Fund) indices belonging to five fragile countries classified by Morgan Stanley (Turkey, South Africa, Brazil, Indonesia, and India) to significant daily changes in Credit Default Swap (CDS) premiums. Using standard deviations of CDS premiums for each country, daily changes that exceed the respective value are filtered, and the changes in iShares MSCI ETF indices for those filtered days were analyzed with the case study model. The study covering the period from January 1, 2016, to December 31, 2023, establishes that iShares MSCI ETF index changes during both positive and negative events are statistically significant. The analysis shows that investors take opposite positions in the related iShares MSCI ETF index on days when CDS premiums change significantly. Investors were observed to react more strongly to significant changes in CDS premiums for Turkey and Brazil. The findings indicate that investor response is more pronounced when CDS premiums increase compared to decreases. The results show that returns can be generated through the creation of strategies which are based on significant changes in CDS premiums.