Dynamic relationship between Turkey and European countries during the global financial crisis

- We analyze the CDS correlations between Turkey and major 13 European countries.
- We obtain the time-varying correlations by consistent DCC.
- Time-varying correlation patterns significantly change following the 2008 crisis.
- The eurozone crisis does not have significant effect on correlations except in a few cases.
- Commonality degree of risk perception towards these economies significantly increases.

This study examines the relationship between time-varying risk perceptions of investors towards major European countries and Turkey. In that manner, we first obtain the dynamic conditional correlations between the credit default spreads (CDSs) of Turkey and 13 European countries from September 2004 to April 2013. Next, we endogenously detect the shifts in these dynamic correlation levels using a penalized contrast methodology. Accordingly, we find positive level shifts in all correlations following the US crisis. The upward trend in all CDS correlations holds during the eurozone debt crisis, but positive changes in correlations are not flagged as level shifts by the model, except in a few cases. The results suggest that Turkey is not immune to global financial conditions and there is integration between Turkey and the major European economies in terms of risk perception after the global financial crisis.