**4.1 Results of the bivariate models**

In the bivariate models, the exchange rates are considered as the determinant of stock markets. **Table 1** gives the result of the linear bivariate modes. Looking at the linear model from Panel A, the short run coefficients associated with exchange rates are significant for all stock markets. The results show that all stock market indices are effected negatively by exchange rates changes as expected in the economic theory. The panel B shows that there is a positive long-run relationship between exchange rates and all markets.

Panel C reports the diagnostics statistics. The results of F test are slightly above the upper bound critical value of 3.35 in all stock indices. The error-correction model denoted by ECM test which shows negative and significant coefficients for all markets. Moreover, the LM test is also applied and the results show insignificant for all markets suggesting that there is no autocorrelation in the optimum model. Ramsey's RESET statistics are also reported to judge misspecification. For instance, if the test statistics of RESET test is more than the critical value of 3.84, it indicates a misspecification problem in the model at some significance level. Given its critical

> value, the RESET statistic is insignificant for all stock market indices, suggesting that the model is correctly specified in the sector. The CUSUM and CUSUM square tests are also reported to establish stability of the short run and the long run estimates. The test results show that the estimated parameters for all stock market indices are stable. As can be seen, estimates are stable at least by one of the tests. Based on the above results, we can conclude that the exchange rate has short-run effects on three major

> *Notes: Numbers inside the parentheses are t-ratios. Superscript \*\*\* represents the significance at 1% level, \*\* at the 5%*

**Variables BIST All BIST 100 BIST 30**

*The Impact of Exchange Rates on Stock Markets in Turkey: Evidence from Linear…*

*ΔlnSPt*�**<sup>1</sup>** �0.45 (�6.76)\*\*\* �0.442(6.70)\*\*\* �0.44(�6.69)\*\*\* *ΔPOS* �1.58(�5.13)\*\*\* �1.62(5.27)\* \*\* �1.66(�5.33)\*\* *ΔPOSt*�**<sup>1</sup>** �0.92(�2.85)\*\* �0.92(2.84)\* \*\* �0.88(�2.68)\*\* *ΔNEG* 0.02 (0.20) 0.0219(0.25) 0.02(0.23) Constant 0.88\*\* (3.05)\*\* 0.88(3.09)\*\*\* 0.94(3.18)\*\*

*POS* 0.81 (1.20) 0.81(1.20) 0.78(1.19) *NEG* 0.22 (0.19) 0.266(0.23) 0.24 (0.21)

Adjusted *R***<sup>2</sup>** 0.335 0.34 0.34 *F* 4.67\* 4.76\* 5,01\*\* *ECMt*�**<sup>1</sup>** �0.08(�2.68) \*\* �0.082(2.71)\*\*\* �0.09(�2.81) \*\*\* *LM* 3.64 (0.16) 3.51(0.17) 3.31(0.19) *RESET* 1.11 (0.35) 1.05(0.37) 0.99(0.40) CS (*CS***<sup>2</sup>**) (5%) Stable Stable Stable Wald (short run) 37.99\*\*\* 39.34\*\*\* 38,28\*\*\* Wald (long run) 0.79 0.71 0.76

**Panel A: Short Run Estimates**

*DOI: http://dx.doi.org/10.5772/intechopen.96068*

**Panel B: Long Run Estimates**

**Panel C: Diagnostic Statistics**

*Results of the non-linear bivariate models.*

**Table 2.**

**163**

However, we would also like to see whether the short-run effects change if non-linear adjustment process used. Then the answer will be based on the results of non-linear ARDL models reported in **Table 2**. The results show that the currency appreciation (ΔPOS) has significant negative short-run effects on all markets, while depreciation (ΔNEG) has no effect as it is insignificant. This results suggests that exchange rate changes in Turkey have asymmetric effect on stock indices in Turkey. When we look at the long-run effects in Panel B, the currency appreciation has positive impact on all stock indices, but the effects are statistically insignificant. The currency depreciation also has no effect on any indices in Turkey. In order to see whether the long-run assessment is valid, we report F test and ECMt-1 test results. In order to further validate the short-run and long-run asymmetric effects, the equality of short-run and long-run coefficient estimates is also tested applying Wald test. As for the long-run asymmetry we test whether λ2 = λ3. According to the Wald test statistic, the asymmetry effects between exchange rates and stock prices are

stock market indices (BIST All, BIST100 and BIST30) in Turkey.

*level and \* at the 10% level. The Δ denotes the first difference of the variables.*

supported for all markets in the short-run.


*Notes: Numbers inside the parentheses are t-ratios. Superscript \*\*\* represents the significance at 1% level, \*\* at the 5% level and \* at the 10% level. The Δ denotes the first difference of the variables.*

#### **Table 1.**

*Results of the linear bivariate models.*


*The Impact of Exchange Rates on Stock Markets in Turkey: Evidence from Linear… DOI: http://dx.doi.org/10.5772/intechopen.96068*

*Notes: Numbers inside the parentheses are t-ratios. Superscript \*\*\* represents the significance at 1% level, \*\* at the 5% level and \* at the 10% level. The Δ denotes the first difference of the variables.*

#### **Table 2.**

2018 M12 for three major stock market indices in Turkey. The results of short and long-run estimates of both linear and nonlinear for the bivariate and multivariate models are reported in **Tables 1** and **2**. Each of the tables consist of three panels: Panel A reports the short run estimates, Panel B reports the long-run estimates and the diagnostic statistics are then reported in Panel C. To ensure one of the requirements of Pesaran et al.'s [20] method that the variables could be I(0) or I [1] but not I [2], we use the traditional Augmented Dickey-Fuller (ADF) tests on levels as well as the first differenced variables. The lag order of the ADF test statistics is determined by the Akaike Information Criterion (AIC) and the results show that there

*Linear and Non-Linear Financial Econometrics - Theory and Practice*

In the bivariate models, the exchange rates are considered as the determinant of stock markets. **Table 1** gives the result of the linear bivariate modes. Looking at the linear model from Panel A, the short run coefficients associated with exchange rates are significant for all stock markets. The results show that all stock market indices are effected negatively by exchange rates changes as expected in the economic theory. The panel B shows that there is a positive long-run relationship between

Panel C reports the diagnostics statistics. The results of F test are slightly above

the upper bound critical value of 3.35 in all stock indices. The error-correction model denoted by ECM test which shows negative and significant coefficients for all markets. Moreover, the LM test is also applied and the results show insignificant for all markets suggesting that there is no autocorrelation in the optimum model. Ramsey's RESET statistics are also reported to judge misspecification. For instance, if the test statistics of RESET test is more than the critical value of 3.84, it indicates a misspecification problem in the model at some significance level. Given its critical

**Variables BIST All BIST 100 BIST 30**

*ΔlnSPt*�**<sup>1</sup>** �0.46(�7.01) \*\*\* �0.45(6.94)\* \*\* �0.45(�6.97) \*\*\* *ΔlnEX* �1.21 (�5.20) \*\*\* �1.25(5.37)\* \*\* �1.28(�5.46) \*\*\* *ln ΔEXt*�**<sup>1</sup>** �0.62 (�2.52) \* �0.62(2.53)\*\* �0.6 (�2.4) \* *Constant* 0.46(2.93) \*\* 0 .47(2.95)\*\*\* 0.51(3.03) \*\*

*lnEX* 1.86 (3.45) \*\*\* 1.82(3.43)\*\*\* 1.76(3.46) \*\*\*

*Notes: Numbers inside the parentheses are t-ratios. Superscript \*\*\* represents the significance at 1% level, \*\* at the 5%*

*level and \* at the 10% level. The Δ denotes the first difference of the variables.*

Adjusted *R***<sup>2</sup>** 0.327 0.33 0.33 *F* 4.35 4.47 4.72 *ECMt*�**<sup>1</sup>** �0.05 (�2.84) \*\* �0.04(2.87)\*\*\* �0.05(�2.95) \*\* *LM* 3.91 (0.14) 3.97(0.14) 3.68(0.16) *RESET* 0.69 (0.56) 0.62(0.60) 0.55(0.65) CS (*CS***<sup>2</sup>**) (5%) Stable Stable Stable

are no I [2] variables.

**4.1 Results of the bivariate models**

exchange rates and all markets.

**Panel A: Short Run Estimates**

**Panel B: Long Run Estimates**

**Panel C: Diagnostic Statistics**

*Results of the linear bivariate models.*

**Table 1.**

**162**

*Results of the non-linear bivariate models.*

value, the RESET statistic is insignificant for all stock market indices, suggesting that the model is correctly specified in the sector. The CUSUM and CUSUM square tests are also reported to establish stability of the short run and the long run estimates. The test results show that the estimated parameters for all stock market indices are stable. As can be seen, estimates are stable at least by one of the tests. Based on the above results, we can conclude that the exchange rate has short-run effects on three major stock market indices (BIST All, BIST100 and BIST30) in Turkey.

However, we would also like to see whether the short-run effects change if non-linear adjustment process used. Then the answer will be based on the results of non-linear ARDL models reported in **Table 2**. The results show that the currency appreciation (ΔPOS) has significant negative short-run effects on all markets, while depreciation (ΔNEG) has no effect as it is insignificant. This results suggests that exchange rate changes in Turkey have asymmetric effect on stock indices in Turkey.

When we look at the long-run effects in Panel B, the currency appreciation has positive impact on all stock indices, but the effects are statistically insignificant. The currency depreciation also has no effect on any indices in Turkey. In order to see whether the long-run assessment is valid, we report F test and ECMt-1 test results. In order to further validate the short-run and long-run asymmetric effects, the equality of short-run and long-run coefficient estimates is also tested applying Wald test. As for the long-run asymmetry we test whether λ2 = λ3. According to the Wald test statistic, the asymmetry effects between exchange rates and stock prices are supported for all markets in the short-run.
