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

in the long run the exchange rate changes affect stock prices positively. Thus the short run relationship between stock prices and exchange rate is not sustained in the long run. When cointegration established among variables then the long run relationship will be relevant. And thus we carry diagnostic statistics reported under Panel C. The F statistic is slightly above the upper bound critical value of 3.35 in all stock prices. The F statistic is statistically significant for all markets which establishes cointegration among variables. We also carry ECM test which is another indication of cointegration and the lagged error term (*ECMt*�1Þ results show significant and negative coefficient. The results of ECM test results supports cointegration among variables. Panel C also reports Langrange Maltiplier (LM) test in order to check for autocorrelation among residuals. The LM test results are insignificant implying that there is no autocorrelation in the residuals. The Ramsey's Regression Specification Error Test (RESET) is also applied to check whether or not the model is misspecified. The results of RESET test statistics are insignificant for all models implies that the models are correctly specified except BIST100. Lastly, we applied the


*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 4.**

*The results of the non-linear multivariate models.*

**4.2 Results of the multivariate models**

decrease stock prices in the short run.

**Panel A: Short Run Estimates**

**Panel B: Long Run Estimates**

**Panel C: Diagnostic Statistics**

*Results of the linear multivariate models.*

**Table 3.**

**164**

*ΔlnEXt*�**<sup>1</sup>** �0.45(2.26)\*\*

**Tables 3** reports the results of short and long-run estimates of linear multivariate models for BIST All Shares, BIST 100 and BIST 30 stock prices. Panel A captures the symmetric effects of exchange rates on stock prices as well as other macroeconomics explanatory variables. The results show that all markets namely, BIST All, BIST100 and BIST30, are negatively affected by exchange rate changes. These markets on the other hand have a positive and statistically significant relationship with industrial production index implying that economic activity in Turkey has a

However, all markets have affected negatively by an increase in interest rates which implies that high interest rates lead to decrease in the investment level in the country and hence decrease economic activity. Likewise, volatility index (VIX) have a negative relationship with all stock market indices which implies that an increase in uncertainty lead to decrease the profitability of firm and thus lead to

When we look at the long run coefficient presented in Panel B, the industrial production index carries significant and positive relationship with all markets while interest rates and volatility index carries negative and significant relationship with stock prices in Turkey. Focusing on the exchange rate on stock prices, we found that

**Variables BIST All BIST 100 BIST 30**

*ΔlnSPt*�**<sup>1</sup>** �0.23(3.98)\*\*\* �0.19(3.43)\*\*\* �0.20(.50)\*\*\* *ΔlnEX* �0.84(4.23)\*\*\* �1.00(5.07)\*\*\* �1.01(5.03)\*\*\*

*ΔlnIR* �0.60(3.88)\*\*\* �0.56(3.64)\*\*\* �0.57(3.56)\*\*\* *ΔlnIPI* 1.36(4.10)\*\*\* 1.41(8.24)\*\*\* 1.36(7.84)\*\*\* *ΔlnVIX* �0.15(2.06)\*\* �0.14(3.82)\*\*\* �0.14(3.72)\*\*\* Constant 0.69(2.06)\*\* 0.71(2.10)\*\* 0.87(2.56)\*\*

*lnEX* 0.22(1.09) 0.13(0.65) 0.15(0.75) *lnIR* �2.98(4.61)\*\*\* �2.88(4.33)\*\*\* �2.95(4.35)\*\*\* *lnIPI* 1.75(4.06)\*\*\* 1.74(3.93)\*\*\* 1.60(3.50)\*\*\* *lnVIX* �0.17(1.96)\* �0.21(2.25)\*\* �0.21(2.22)\*\*

Adjusted *R***<sup>2</sup>** 0.59 0.58 0.57 *F* 4.61\*\* 429\*\* 4.22\*\* *ECMt*�**<sup>1</sup>** �0.20(3.76)\*\*\* �0.19(3.63)\*\*\* �0.19(3.62)\*\*\* *LM* 2.29(0.31) 4.28(0.11) 2.69(0.26) *RESET* 2.48(0.06) 2.43(0.07)\* 1.54(0.20) CS (*CS***<sup>2</sup>**) (5%) Unstable Stable Stable

*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.*

significantly positive impact on the stock markets in the short run.

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

cumulative sum of recursive residuals (CUSUM denoted CS) and the cumulative sum of recursive residuals of square (CUSUMQ denoted *CS*<sup>2</sup> ) tests. According to both CS and *CS*<sup>2</sup> test results, the models are stable except BIST All Shares.

raw and intermediate goods. The results also show that the economic activity has positive and significant effects on three major stock market indices implying that it is the main determinant in the long-run. Moreover, interest rates and volatility index were negative and significant in all markets. Thus, it has important implica-

Department of Economics, Istanbul Sabahattin Zaim University, Istanbul, Turkey

© 2021 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/ by/3.0), which permits unrestricted use, distribution, and reproduction in any medium,

\*Address all correspondence to: mustafa.cakir@izu.edu.tr

provided the original work is properly cited.

tions for policy makers to provide stable prices and diverse investors.

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

**Acknowledgements**

**Author details**

Mustafa Çakır

**167**

https://orcid.org/0000-0003-4565-9581.

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

We also test the asymmetric effects of exchange rate changes on stock prices using the nonlinear multivariate models (see **Table 4**). Thus we decompose the exchange rates changes into its positive (*POS*Þ and negative (*NEG*) partial sums to test whether stock prices have asymmetric relationship with exchange rates changes. The results show that the currency appreciation (Δ*POS*Þ has a negative and significant coefficient but the currency depreciation (Δ*NEG*) do not have significant coefficient. This implies that there is asymmetric relationship between the exchange rate and stock prices in the short-run. This asymmetric relationship is not continue in the long-run as in Panel B, *POS* and *NEG* variables have insignificant coefficients. When we look at the effects of other variables we see that the industrial production index has positive and significant effect both in the short and long run.
