Abstract
This study investigates relationships between macroeconomic variables and stock market over the period of 1987Q1-2012Q1 for Turkey. The study is conducted by evaluating 2001 crisis, the most severe crisis in the history of Turkey which caused a cyclical shift, which has not been in consideration by the previous literature. This study used Toda and Yamamoto (1995) method to uncover those relationships. Here, those investigations provide information on whether Turkish stock market is efficient or not and whether the stock market can be used as a leading indicator for one or more fundamental macroeconomic variables. The results indicated that 2001 crisis had statistically significant impact on the stock market and Turkish economy. Before 2001 crisis, the stock market was not efficient but after 2001 crisis the stock market became efficient. The stock market was also found as a leading indicator for the real economic activity that is consistent with the literature findings on Turkey.
Highlights
As a source of risk, modern financial theory focuses on systematic factors and in the long-run return on an individual asset is accepted to reflect change in systematic factors, so modern financial theory suggests that financial assets’ market is related to economy’s financial and real segments (Ahmed, 2008, p. 142)
This is based on Fama (1970)’s efficient market hypothesis, which assumes that stock price reflects all past information so by using past information nobody obtains above normal returns
Ajayi and Mougoué(1996) studied 8 developed countries and studied exchange rate, except for United States, and the findings indicated that those stock markets were found as leading indicators for exchange rate
Summary
As a source of risk, modern financial theory focuses on systematic factors and in the long-run return on an individual asset is accepted to reflect change in systematic factors, so modern financial theory suggests that financial assets’ market is related to economy’s financial and real segments (Ahmed, 2008, p. 142). The stock market either follows change in economic factors or it moves before the economic factors This is based on Fama (1970)’s efficient market hypothesis, which assumes that stock price reflects all past information so by using past information nobody obtains above normal returns. It is expected that these factors affect the stock market For this reason, the macroeconomic variables -the main indicators of the economy- and the stock market are expected to be causal relationships. There is no consensus on the existence and nature of relationship between key macroeconomic variables, at least the ones included in this study, and stock market. This study investigates long-run relationship between stock market and abovementioned fundamental macroeconomic variables over the period of 1987Q1 to 2012Q1 by using Toda and Yamamoto (1995). The following parts of this study consist of a literature review that discuss briefly economic literature on theoretical and empirical relationship between the macroeconomics variables and stock market, model that is used in this study and empirical application, and conclusion which the results of this study are discussed
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