PERFORMANCE OF CAPITAL MARKETS IN THE EU AND IN TURKEY: COINTEGRATION ANALYSIS

Abstract

The paper deal with the problem of crisis, and post-crisis, performance of capital markets in the European Union and in Turkey. Due to liberalization of all balance of payments accounts and increasing financial integration of the Eurozone with the rest of the world there was a very strong response of stock exchanges to the sub-prime loan crisis originating in the United States. There was no country that escaped the wave effects of this crisis. There should be no doubt that what matters for each and every economy in the world these days is not the resistance for external factors, but the speed of recovery. In this regard internal factors play the crucial role, both in the private sector, and in a national economic policy. We should no longer ask questions whether economic integration is beneficial or not, but the focus should be on economic policies and general economic framework, including legal rules, that allow for fast and dynamic recovery and returning on a sustainable growth path. When observing economic performance of the European Union and its neighbors, it becomes evident that there are economies that managed to recover quickly after a short recession caused by global factors. A good example is Turkey with its vibrant economy and fast growing standard of living. Changes in the wealth of a nation lead to permanent changes in consumption patterns and as such create market opportunities for European exporters. However, before the real sector expansion is announced, there is a need for fixed capital formation domestically. For emerging and developing economies it is necessary to import capital and initiate growth on the basis of foreign savings. Turkey is such a case, where prior to fast economic expansion, a significant development of a national stock market happened. The Istanbul Stock Exchange attracted also foreign investors, allowing the European capital to take part in the success of Turkish economy. Using simple statistical methods of cointegration to disclose co-movements in stock market indexes, it became possible to answer questions about the nature and strength of integration of financial markets in the European Union and in Turkey. It turned out that performance of the Istanbul Stock Exchange is related strongly to the London Stock Exchange and it responds more than proportionately to all developments in the UK capital market. In the same time, the cointegration with the stock market in Frankfurt is less pronounced. Despite FTSE and DAX are highly positively correlated, the response of the ISE to developments in DAX are less than proportional. It is possible to observe stronger relationship in the crisis and post-crisis period. While DAX and FTSE diverged, the strength of response of the ISE to both: DAX and FTSE was much stronger. Coefficients estimated for the whole period are on average by 100% higher than for the pre-crisis period. This result may indicate that integration of the studied markets has increased recently. Alternative interpretation is based on a belief that there has been a common path during crisis and post-crisis response. Interpretting the performance of studied stock market indexes, as leading indicators allows for conclusion that the European Union will hardly resume growth in 2012. Investment opportunities in Turkey seem much more attractive and promising than in the EU. This may lead to capital reallocation between the EU-27 and Turkey, which may further aggravate the problem of unemployment and economic stagnation in the EU. DOI: http://dx.doi.org/10.5755/j01.eis.0.6.1517