**2. Literature review**

The relationship between stock prices and exchange rates has been extensively studied by many researches. Some find positive association between the two [4, 5] others discover negative relations [6, 7] and even no relationship at all [8].

Studies on the relationship between exchange rate and stock prices in the literature can be summarized in different categories according to their empirical results. Firstly, there are some studies that find significant positive relationship between the two. For instance, the relationship between stock prices and exchange rates on financial, manufacturing, and services indices and fifteen sub-indices in Turkey investigated using Johansen cointegration test and the results show evidence that there is a long-run relationship among these indices and exchange rates. The results suggest that exchange rate exposure on financial and manufacturing industries have positive forex beta for the dollar exchange rate, but in terms of service industries there is negative forex beta [9]. A similar exercise undertook to investigate the effects of changes in foreign exchange on the stock returns on company level using panel data analysis. The results show evidence that changes in real exchange rate has positive and significant impact on stock returns in the manufacturing and trade sectors between the years 2006–2014 [10].

Secondly, there are some studies that find negative relationship between the two [6, 11]. For example, Akıncı and Küçükçayşı analyses the relationships between stock markets and exchange rates in 12 countries and finds that the exchange rate has negative effect on the stock market index [6]. Belen and Karamelikli investigates the causality between the exchange rates and stock returns in Turkey and finds no evidence supporting any causal relationship between the dollar exchange rate and the BIST-30 Index [11]. Tsai examine the relationship between stock price index and exchange rate in six Asian countries, namely Singapore, Thailand, Malaysia, the Philippines, South Korea, and Taiwan. Their results show that all countries in the study have negative the relationship between stock prices and exchange rates, which is in line with the portfolio balance effect [12]. Recently, the relationships between real exchange rate returns and real stock price returns in Malaysia, the Philippines, Singapore, Korea, Japan, the United Kingdom and Germany examined using dynamic conditional correlation (DCC) and multivariate generalized autoregressive conditional heteroskedasticity (MGARCH) models. The results show that there is a negative relationship between real exchange rate return and real stock price return in Malaysia, Singapore, Korea and the UK [13].

Thirdly, there are some studies that find two-way causality between the exchange rate and stock prices [14]. For instance, Zeren and Koç examines the *The Impact of Exchange Rates on Stock Markets in Turkey: Evidence from Linear… DOI: http://dx.doi.org/10.5772/intechopen.96068*

relationship between exchange rates and stock market indices in Turkey, Japan and England. They use using the time varying causality test and find two-way causality between the exchange rate and stock prices for during the global crises period. However, some empirical studies find one-way causality between the exchange rate and stock prices [14]. Coskun et al. investigate the link between stock index and macroeconomic variables (USD exchange rate, exports and imports, industrial production index, and gold price using monthly data for Turkey. Using Granger causality, they find one-way causality from exchange rate to BIST, and using impulse response function their results suggest positive response of BIST to exchange rate shock [4]. Aydemir and Demirhan analyses the causality between exchange rates and stock prices for national 100, services, financials, industrials, and technology indices. The results suggest that there is positive bi-directional causal relationship from technology indices to exchange rate, but in terms of national 100, services, financials and industrials indices to exchange rate the paper does provide negative causality [15]. On the other hand, Kendirli and Çankaya (2016) analyze the causal relationship between the USD and Istanbul Stock Exchange National 30 Index from 2009:01 to 2014:12 monthly data and find no causal relationship between USD and BIST-30 index returns [8].

Fourthly, there are some studies that investigates short and long-run relationship between the two [16]. Recently, the relationship between the stock prices and exchange rates, specifically BIST 100 and 23 sectors indexes investigated using ARDL model. The results suggest that the long run relationship exist only between exchange rate and textile, wholesale and retail, and technology indices [17]. The short and long-term relations between exchange rate and financial sector index, industrial sector index, service sector index and technology sector index investigated in Turkey [18]. The results suggest that exchange rate has no long term relationship with stock prices and the sectors. However, in short term relationship, the results show that exchange rate has bidirectional causality with stock prices, technology and service sectors while a unidirectional causality with financial sector index. Akel and Gazel (2014) investigate the long-run and short-run equilibrium relationships between real effective industrial index in Turkey. Based on ARDL cointegration analysis, they find that there is a positive relationship between industrial index and Dollar Index and Euro/TL exchange rate, but there is no evidence on the relationship between real effective exchange rate and industrial index. Based on VECM model, they find that industrial index is positively related to the REER while it is negatively related to the Dollar Index and Euro/TL exchange rate [19].
