Effects of macroeconomic variables

on Istanbul stock exchange indexes

Cumhur Erdem*, Cem Kaan Arslan and Meziyet Sema Erdem
Gaziosmanpasa University, Turkey
Price volatility spillovers in ISE indexes were analysed based on monthly
data from January 1991 to January 2004 for exchange rate, interest rate,
ination, industrial production and M1 money supply. The Exponential
Generalized Autoregressive Conditional Heteroscedasticity model was
used to test univariate volatility spillovers for macroeconomic variables.
It was found that there exists unidirectional strong volatility spillover from
ination, interest rate to all stock price indexes. There are spillovers from
M1 money supply to nancial index, and from exchange rate to both
IMKB 100 and industrial indexes. There is no volatility spillover from
industrial production to any index.
I. Introduction
It has been argued that certain macroeconomic
variables such as ination, interest rate, money
supply, industrial production and exchange rate
have signicant impact on stock prices. Portfolio
holders expectations about future values of macro-
economic variables can have impact on stock prices
and macroeconomic variables become risk factors in
their portfolio substitution. Thus, its important to
study the eect of macroeconomic variables on
stock markets.
The relationship between ination and stock prices
has been generally theorized negative (Fama, 1981;
Chen et al., 1986; Wongbangpo and Sharma, 2002).
Ination has impact on stock prices through the
impact of future earnings and the manner that
investors discount future earnings. Participants in
the stock market anticipate the changes in real
activity, so that stock prices appear to move inversely
with ination.
The relationship between stock price and nominal
interest rate reects the ability of an investor to
change the combination of his portfolio between
stocks and bonds. An increase in interest rates raises
the required rate of return, and negatively aects the
value of assets. Specically, an increase of interest
rate encourages the investor to change the structure
of his portfolio in favour of bonds and vice versa.
As a result, stock prices are expected to decrease.
A decline in interest rates lead to an increase in the
present value of future dividens (Hashemzadeh and
Taylor, 1988). Modigliani and Cohn (1979) state
that interest rate is one of the most important deter-
minants of stock prices.
Changes in money supply may aect stock prices
through the changes in portfolio substitution or
inationary expectations. Since the ination rate
is positively related to money growth rate (Fama,
1981), a positive change in the money supply may
cause an increase in the discount rate and lower
stock prices. As a result, decrease of investors demand
for equity following an increase in the money supply
aects equity prices (Dhakal et al., 1993).
Depreciation of currency of a country leads to
a relative decrease in price of that countrys products
in international markets, an increase in demand for
its export goods, and increase cash ows into the
*Corresponding author. E-mail: buguk@gop.edu.tr
Applied Financial Economics ISSN 09603107 print/ISSN 14664305 online # 2005 Taylor & Francis
987
http://www.tandf.co.uk/journals
DOI: 10.1080/09603100500120365
Applied Financial Economics, 2005, 15, 987994
country. At the same time, weak currency increases
the cost of imported goods. If a country imports most
of the production inputs, weak currency may aect
the country negatively.
The level of real economic activity, as proxied here
by industrial production is likely to have a positive
relation with stock prices through its eect on
expected future cash ows. Fama (1990) and Geske
and Roll (1983) suggested a positive relationship
between industrial production and stock prices.
Since the Istanbul Stock Exchange is a developing
stock market, it is important to empirically test
whether certain economic indicators such as ination,
interest rates, foreign exchange, industrial production
and money supply are signicant impact on stock
market indexes.
The objectives of this study are to examine
the extent to which volatility in macroeconomic vari-
ables spillover into Istanbul Stock Exchange (ISE)
IMKB 100, nancial, industrial and services indexes
and to test the existence of seasonality in the series
under consideration. The univariate EGARCH
model is used to test for volatility spillover from
certain macroeconomic variables to stock price
indexes. The study contributes to the literature on
price volatility by applying a volatility spillover
model to Turkish data.
II. Review of the Literature
Several studies have been conducted about the eects
of macroeconomic variables on stock prices.
Wongbangpo and Sharma (2002) examine the role
of GNP, the consumer price index, the money supply,
the interest rate, and the exchange rate on the stock
prices in Indonesia, Malaysia, the Philippines,
Singapore and Thailand and nd causal relationships
from the macroeconomic variables to stock prices.
They observe that the stock prices are negatively
related to ination. Interest rate is negatively related
with stock prices in the Philippines, Singapore and
Thailand, but positively related with stock prices in
Indonesia and Malaysia. The exchange rate variable
is positively related to stock prices in Indonesia,
Malaysia and the Philippines, but negatively in
Singapore and Thailand.
Chen et al. (1986) explore a set of economic vari-
ables as systematic inuences on stock market
returns and examine their inuence on asset
pricing. Their ndings suggest that stock returns
are exposed to systematic economic news and
they are priced in accordance with their exposure.
Poon and Taylor (1991) investigate the eect of
macroeconomic variables on UK stock prices and
nd that the macroeconomic variables do not aect
stock market prices.
Dhakal et al. (1993) analyse the relationship
between the money supply and share prices for the
United States and nd a direct causal impact
of changes in the money supply on share prices.
Cheng (1995) examines the relationships between
security returns and economic indicators and nds
a positive relationship between stock price and
money supply, government securities price index and
unemployment. Morelli (2002) examines the relation-
ships between conditional stock market volatility
and conditional macroeconomic volatility based
upon monthly UK data for industrial production,
real retail sales, money supply, ination and
exchange rate and nds that the volatility in the
macroeconomic variables do not explain the volatility
in the stock market.
Apergis and Eleftheriou (2002) investigate the rela-
tionship between stock prices, ination and interest
rates in Greece and nd that the stock prices in ASE
follow ination rather than interest rate movements,
despite the close relationship between ination and
interest rates.
Fama (1981) investigates the relationships between
stock prices and real activity, ination, and money.
He nds a strong positive correlation between com-
mon stock returns and real variables, such as indus-
trial production, GNP, the money supply, lagged
ination and the interest rate. Rapach (2001) exam-
ines the long run relationship between ination and
real stock prices for 16 industrialized countries and
nds that an increase in ination does not cause a
sustained real depreciation of share values. Chopin
and Zhong (2001) examine the relationship between
stock returns and ination and they nd that there
is a negative correlation between stock returns and
ination.
Al-Khazali (2003) investigates short- and long-
term relationship between stock prices, ination and
output for 21 emerging markets. He nds a negative
relationship between real stock return and ination
in the short term except Malaysia. In the long run,
he nds a positive relationship between stock returns
and both expected ination and change in the
expected ination.
Mukherjee and Naka (1995) investigate whether
cointegration exists between the Tokyo Stock
Exchange index and six Japanese macroeconomic
variables, namely the exchange rate, money supply,
ination, industrial production, long-term govern-
ment bond rate, and call money rate and nd that
there is a cointegration and stock prices contribute
this relation.
988 C. Erdem et al.
Bulmash and Trivoli (1991) develop a model to
describe the relation between stock price and
economic variables. They nd that stock prices are
predicted by various lagged economic variables such
as money supply and interest rate. Dritsaki and
Dritsaki (2004) examine the long run relationship
between the Greek Stock Market Index and its
fundamentals, namely industrial production, ination
and interest rates and nd a signicant causal rela-
tionship between stock prices and macroeconomic
variables.
III. Data and Methodology
Time series evidence concerning price transmission
and price volatility in ISE are explored using a nat-
ural logarithm of monthly price series. Interest rate
data were obtained from International Monetary
Funds International Financial statistics. The data
for stock price indexes, exchange rate (US dollar),
consumer price index, used as a proxy for the
ination, real economic activity, proxied by industrial
production were obtained from The Central Bank
of Republic of Turkey Data Bank.
Descriptive statistics are reported in Table 1 for the
price series under consideration. The skewness and
kurtosis measure indicate that series are negatively
skewed and leptokurtic relative to the normal
distribution. Normality is rejected in all cases except
one variable based on the Jarque-Bera statistic.
Unit root tests
The augmented DickeyFuller (ADF) (Dickey and
Fuller, 1979) and PhillipsPerron (PP) nonparametric
test (Phillips and Perron, 1988) were employed to
determine the time series properties (or the order of
integration) of each variable to avoid the problem of
non-stationarity of the data by testing for a stochastic
trend. The number of lags necessary to remove
residual autocorrelation in the monthly data is
determined using the Akaike Information Criterion.
The results reported in Table 2 show that, at the
5% level of signicance, the null hypothesis of a unit
root in the series cannot be rejected for most of the
series. To examine the data for the presence of a
second unit root, the ADF and PP tests are applied
to the rst dierences of the series. The results of
these tests indicate that the presence of a second
unit root is rejected at the 5% level.
1
Therefore, the
rst dierence of all the series under consideration is
stationary, thus conrming that the series are likely to
be I (1) in the log-level.
1
Results of the second unit root tests are not reported in here because of page limitations but are available from the authors
on request.
Table 1. Descriptive statistics of the variables (natural logarithm)
Statistics
Series Mean Std. Dev Skewness Kurtosis Jarque-Bera
Ination 5.612 2.056 0.219 1.704 12.250*
(0.002)
Industrial production 4.510 0.134 0.182 2.506 2.465
(0.291)
Exchange rate 11.690 2.004 0.262 1.748 12.046*
(0.002)
Interest rate 4.303 0.405 0.794 3.499 18.144*
(0.000)
M1 Money supply 22.958 2.071 0.113 1.630 12.228*
(0.002)
IMKB 100 Index 7.048 2.154 0.344 1.674 14.598*
(0.001)
Financial index 7.073 2.396 0.327 1.630 15.675*
(0.000)
Industrial index 7.005 2.013 0.357 1.743 13.675*
(0.001)
Services 8.942 0.282 0.182 2.068 2.466
(0.291)
Note: Asterisk (*) denotes the null of normality was rejected at 1% signicance level. The values inside the
parenthesis show the p-values for Jarque-Bera normality test.
Macroeconomic variables on Istanbul stock exchange 989
Seasonality in volatility
In this study, it is hypothesized that strong patterns
of seasonality may be present in volatility patterns
for each series. Following Goodwin and Schnepf
(1998), a deterministic seasonal component is incor-
porated into models of variability by adding a sum of
trigonometric functions corresponding to the month
of the year. If one denes d
t
to be the month of the
year corresponding to observations t, the seasonal
components can be written as:
s
t

X
k
i1

i
cos
2id
t
12

i
sin
2id
t
12
!
1
This specication provides a seasonal function with
a period of one year and can be interpreted as
providing a k
th
order Fourier approximation to the
unknown seasonal function. Following Goodwin and
Schnepf (1998), k 3 is utilized in representing the
seasonal components.
The univariate EGARCH model and volatility spillover
The exponential generalized autoregressive condi-
tional heteroskedasticity (EGARCH) model devel-
oped by Nelson (1991) is utilized in order to
capture the asymmetric impact of shocks on volatili-
ties, and to avoid imposing non-negativity restric-
tions on the values of the GARCH parameters to
be estimated. Specically, percentage changes in
prices are modelled as follows:
R
t
o
0

X
r
i1
o
1
R
ti
c
t
2
where
c
t
n
t1
$ N0, o
2
t
3
and:
logo
2
t
exp a
0

X
q
i1
a
i
gz
ti

X
p
i1
b
i
logo
2
ti

( )
4
gz
t
z
t
z
t

E z
t

5
where R
t
is natural logarithm of the series, c
t
is
the stochastic error,
t 1
is the information set at
time t 1, o
2
t
is the conditional (time varying)
variance, and z
t
is the standardized residuals (c
t
/o
t
).
Conditional on
t 1
, e
t
is assumed to be normally
distributed with a zero mean and variance o
2
t
.
Equation 2 (the conditional mean equation) is
specied as an autoregressive process of order
r [AR(r)]. To specify the lag length r for each series,
the autocorrelation and partial autocorrelation
functions of each series are considered and residuals
from the mean equations are then tested for whiteness
using the Ljung-Box statistics to determine the lag
length, r, for each series. It was found that two
lags are optimal for each return series to yield
uncorrelated residuals.
Equation 4 (conditional variance equation) reects
the EGARCH( p, q) representation. According to the
EGARCH, the variance is conditional on its own
past values as well as a function of z
t
, or the standar-
dized residuals (c
t
/o
t
). The persistence of volatility
implied by Equation 4 is measured by
P
p
i1
b
i
- 1.
That is, if volatility persists after a shock has occurred,
the sum of the b
i
coecients should be less than 1.
In Equation 5, the second term captures the
ARCH eect, which is similar to the concept behind
the GARCH specication. The parameter allows for
this ARCH eect to be asymmetric.
2
A statistically
2
If 0 then a positive shock has the same eect as a negative eect as a negative shock of the same magnitude. If
0 > >1, a negative shock increases volatility more than a positive shock and thus, measures the asymmetric eect of
shock on volatility. If <1, a negative (positive) shock actually increase (reduces) volatility.
Table 2. Unit root tests for macroeconomic variables and stock price indexes
ADF PP
Series Intercept Trend and intercept None Intercept Trend and intercept None
Ination 3.152* 2.324 2.177* 3.484*** 2.274 7.835***
Industrial production 1.746 3.624* 0.967 4.148*** 7.403*** 0.762
Interest rate 1.393 1.963 0.704 1.789 2.404 0.559
Money supply 1.266 0.880 5.045*** 0.758 1.226 11.162***
Exchange rate 2.119 0.537 3.049*** 2.492 0.568 5.640***
IMKB 100 index 1.131 1.558 2.301* 0.960 1.539 2.628***
Financial index 0.983 1.704 2.003* 0.774 1.685 2.230*
Industrial index 1.166 1.789 2.464* 1.026 1.844 2.788***
Services index 2.535 2.395 1.110 2.413 2.219 1.222
Note: * and *** indicate the rejection of the unit root null hypothesis at the 1% and 10% signicance levels, respectively.
990 C. Erdem et al.
signicant indicates that an asymmetric eect exists.
Lag truncation lengths, p and q, are determined using
likelihood ratio (LR) tests of alternative specica-
tions. Based on these tests, EGARCH(1,1) models
are tted.
To test for spillover from any macroeconomic
variable to stock price index, the approach used by
Hamao et al. (1990), Theodossiou and Lee (1993),
Kanas (1998) and Kanas and Kouretas (2001) is
followed. According to these authors, the most recent
squared residuals from the mean-conditional
variance formulation of the macroeconomic variables
are introduced as an exogenous variable in the
conditional variance equation for the stock price
indexes. To illustrate, consider IMKB 100 index. To
test for spillover from macroeconomic variables to
IMKB 100 index, the squared residuals series for
ination, interest rate, foreign exchange, M1 money
supply and industrial production are introduced as
exogenous variables in the conditional variance
equation of IMKB 100 index. Thus, the conditional
variance equation for IMKB 100 becomes:
logo
2
spi,t
exp
a
0
a
1
gz
spi,t1
b
1
logo
2
spi,t1

s
1
logU
int,t
s
2
logU
inf ,t

s
3
logU
exh,t
s
4
logU
M1,t

s
5
logU
inp,t

8
>
>
>
>
>
<
>
>
>
>
>
:
9
>
>
>
>
>
=
>
>
>
>
>
;
6
where U
int,t
, U
inf,t
, U
exh,t
, U
M1,t
, U
inp,t
, are the
contemporaneous squared residuals (from AR(2)-
EGARCH(1,1) models) for interest rate, ination,
exchange rate, M1 money supply and industrial
production, respectively, and z
spi,t1
is the lagged
standardized residuals for stock price index.
Existence of volatility spillover is indicated by the
statistical signicance of s
1
through s
5
. Statistical
inference regarding these parameters (the ss)
is based on robust standard errors derived by
Bollerslev and Wooldridge (1992) in order to allow
for possible violations of the assumption of normality
for the conditional errors.
3
Given a sample of T observations and conditional
normality for the price returns in each equation, the
log-likelihood function for the univariate EGARCH
is given by:
L T,2 log2 0.5
X
T
t1
logo
2
t
7
where is the parameter vector (o
0
, o
1
, o
2
, a
0
, a
1
, b
1
,
s
1
, s
2
, s
3
, s
4
, s
5
, ) to be estimated. The BHHH
algorithm is used to maximize L.
IV. Results
All models were determined to be best t by
EGARCH(1,1) specication. The resulting models
are presented in Table 3. The degree of volatility
persistence (as measured by b
1
) is statistically signi-
cant for ination, interest rate, M1 money supply,
exchange rate and industrial production. This result
suggest that once a shock has occurred, volatility
tends to persist for long periods since b
1
is close
to 1. For stock price indexes, the ARCH eect
parameters are statistically signicant and the length
of persistence appears to be shorter.
The asymmetric eect parameter is signicant
for IMKB 100, nancial, ination and industrial
production. The sign on the coecient is positive
except for industrial production, suggesting that
a positive shock does not have the same eect as
a negative shock of the same magnitude. More
generally, a positive shock increases volatility more
than negative shock.
The Ljung-Box (LB in Table 3) statistics on
standardized and squared standardized residuals
indicate that the EGARCH model captures all linear
and nonlinear dependencies in the series. Finally,
the Jarque-Bera normality test results indicate that
standardized residuals for ination, interest rate,
exchange rate and industrial production exhibit
strong deviations from normality, thus justify the
use of the robust t-statistical inferences. Results
of seasonality tests are presented in Table 4.
Trigonometric seasonality components are statisti-
cally signicant in several cases, conrming the
signicance of seasonality in the volatility of series
under consideration.
The results of the univariate EGARCH model
testing volatility spillover are shown in Table 5.
There are strong volatility spillovers from ination,
interest rate to all indexes except ination to
nancial index, exchange rate volatility spillovers
into both IMKB 100 and industrial indexes and M1
money supply volatility spillovers only to nancial
index. There is no volatility spillover from industrial
production to any index. Finally, all Ljung-Box
statistics for the standardized and squared
standardized residuals indicate that the univariate
3
Conventional standard errors tend to underestimate the true standard errors, especially for the parameters in the conditional
variance equation (Susmel and Engel, 1994, p. 4).
Macroeconomic variables on Istanbul stock exchange 991
Table 3. EGARCH model estimation results
Stock price indexes and macroeconomic variables
Coecients IMKB 100 IND FIN SERV INF INT EXCH M1 INP
o
1
1.241*
(14.054)
1.196*
(13.218)
1.312*
(15.581)
1.243*
(9.960)
1.714*
(19.141)
1.362*
(13.904)
1.586*
(16.891)
0.832*
(13.546)
0.622*
(8.303)
o
2
0.237*
(2.681)
0.193*
(2.128)
0.309*
(3.659)
0.241**
(1.93)
0.713*
(7.942)
0.359*
(3.686)
0.585*
(6.203)
0.169*
(2.761)
0.388*
(4.888)
a
0
3.466*
(2.951)
3.884*
(4.011)
3.006*
(2.643)
5.212*
(4.38)
2.232*
(1.919)
0.532*
(2.865)
1.336*
(4.582)
12.090*
(52.73)
2.412*
(2.142)
a
1
0.311**
(1.755)
(0.455)*
(2.033)
0.226**
(1.791)
0.649*
(2.872)
0.196
(1.347)
0.335*
(2.473)
0.864*
(3.113)
0.243*
(2.790)
0.275*
(1.925)
b
1
0.216
(0.758)
0.214
(1.437)
0.277
(0.946)
0.114
(0.39)
0.707*
(5.402)
0.934*
(29.047)
0.900*
(19.629)
0.919*
(30.83)
0.502*
(2.209)
0.207**
(1.712)
0.162
(0.711)
0.234*
(2.032)
0.274
(1.531)
0.500*
(3.952)
0.227
(1.269)
0.125
(0.531)
0.049
(1.091)
0.391*
(3.515)
Log likelihood 96.969 104.298 82.299 56.532 378.7809 111.831 327.420 254.347 189.025
Diagnostic on standardized and squared standardized residuals
LB(16) 20.18
(0.212)
21.766
(0.151)
16.863
(0.394)
14.360
(0.572)
46.016*
(0.000)
19.156
(0.261)
21.725
(0.152)
57.413*
(0.000)
90.18*
(0.000)
LB
2
(16) 13.317
(0.649)
13.910
(0.605)
9.507
(0.891)
12.787
(0.688)
3.102
(1.000)
22.02
(0.143)
7.420
(0.964)
27.553*
(0.036)
22.76
(0.120)
Jarque-Bera 0.105
(0.948)
1.809
(0.405)
0.494
(0.781)
1.065
(0.588)
998.65*
(0.000)
39.737*
(0.000)
40.523*
(0.000)
0.379
(0.827)
9.95*
(0.007)
Note: * and ** indicate the rejection of the null hypothesis at the 1% and 5% signicance levels, respectively. The values
inside the parentheses represent the robust t-statistics. o
1
and o
2
are the coecients of the rst and second order autoregressive
process specied for the mean equations. b
1
is the measure of the volatility persistence. a
1
and a
2
are the measure of
the autoregressive conditional heteroscedasticity (ARCH) eect. LB(16) and LB
2
(16) are the Ljung-Box statistics applied
on the standardized and squared standardized residuals respectively. Jarque-Bera represents normality test results with the
p-values inside the parentheses.
Table 4. Maximum likelihood estimation results for seasonality in volatility of prices
Stock price indexes and macroeconomic variables
Coecients IMKB 100 IND FIN SERV INF INT EXCH M1 INP
Intercept (Mean) 0.065*
(2.04)
0.059**
(1.79)
0.033**
(1.87)
0.514*
(4.21)
0.033*
(5.75)
0.083*
(2.47)
0.040*
(4.06)
0.124*
(2.67)
0.420*
(2.75)
AR(1) 1.234*
(14.91)
1.167*
(13.63)
1.352*
(18.58)
1.176*
(11.29)
1.418*
(23.26)
1.400*
(59.61)
1.499*
(18.50)
0.869*
(10.44)
0.472*
(5.94)
AR(2) 0.240*
(2.91)
0.171*
(2.00)
0.354*
(4.87)
0.232*
(2.36)
0.419*
(6.93)
0.381*
(17.81)
0.501*
(6.18)
0.128
(1.54)
0.436*
(5.63)
Intercept
(Variance)
3.736*
(3.05)
0.012*
(4.73)
2.660*
(2.36)
0.013*
(4.66)
0.0004*
(9.49)
0.006*
(4.01)
1.889*
(3.88)
10.125*
(4.31)
0.005*
(4.56)
SIN1 0.088
(0.51)
0.004
(0.93)
0.036
(0.23)
0.002
(0.70)
0.0002*
(5.26)
0.001
(0.72)
0.128
(1.04)
0.954*
(2.55)
0.004*
(2.28)
SIN2 0.061
(0.42)
0.002
(0.65)
0.033
(0.236)
0.007*
(2.04)
0.0003*
(7.19)
0.002**
(1.82)
0.319**
(1.78)
0.418
(1.27)
0.002
(1.38)
SIN3 0.119
(0.85)
0.001
(0.36)
0.151
(0.82)
0.007*
(2.57)
0.0004*
(7.05)
0.001
(0.62)
0.093
(0.63)
0.182
(0.77)
0.002*
(2.58)
COS1 0.416*
(2.61)
0.006*
(2.11)
0.312*
(2.11)
0.012*
(3.00)
0.0004*
(7.24)
0.001
(0.78)
0.148
(1.37)
0.318
(0.94)
0.002**
(1.83)
COS2 0.141
(0.99)
0.001
(0.04)
0.136
(0.97)
0.002
(0.77)
0.0002*
(3.67)
0.001
(0.34)
0.127
(0.83)
0.291
(0.92)
0.001
(1.17)
COS3 0.139
(0.87)
0.001
(0.52)
0.310**
(1.81)
0.002
(0.69)
0.00001
(0.17)
0.005*
(3.31)
0.141
(0.54)
0.019
(0.07)
0.002
(1.49)
Log likelihood 102.404 108.26 88.954 63.46 410.39 105.82 339.744 261.379 205.456
Note: * and ** indicate the rejection of the null hypothesis at the 1% and 5% signicance levels, respectively.
992 C. Erdem et al.
EGARCH models with spillover eects are correctly
specied.
V. Conclusions
This study examines whether there is volatility
spillover from ination, interest rate, exchange rate,
M1 money supply and industrial production to
Istanbul Stock Exchanges stock price indexes
using monthly data. The exponential GARCH (or
EGARCH) model was used to capture possible
spillovers among series. The results show that there
is signicant unidirectional spillover from macroeco-
nomic variables to stock price indexes. There are
negative volatility spillovers from ination to stock
price indexes except services index and positive
spillover from interest rate to stock price indexes
again except services index (negative spillover).
It was observed that there is a positive volatility
spillover from exchange rate to both IMKB 100
and industrial indexes.
Results of this study agree with those of Fama,
Rapach, Wongbangpo and Sharma, Chopin and
Zhong who found that negative relationship between
stock price and ination. In terms of interest rate, our
ndings disagree with the ndings of Wongbangpo
and Sharma for Philippines, Singapore and
Thailand and agree with some authors ndings for
Indonesia and Malaysia.
These results provide evidence of volatility spill-
over in an emerging stock market, Istanbul Stock
Exchange and can have important implications for
investors, fund managers and policy-makers.
Table 5. Univariate EGARCH models and volatility spillovers
Parameters IMKB 100 Financial Industrial Services
o
1
1.284*
(14.97)
1.379*
(18.14)
1.134*
(13.59)
1.265*
(24.14)
o
2
0.281*
(3.27)
0.376*
(4.94)
0.131
(1.57)
0.264*
(5.05)
a
0
4.000*
(4.47)
3.072*
(2.82)
5.096*
(7.98)
6.973*
(18.40)
a
1
0.209
(0.87)
0.076
(0.372)
0.349
(1.46)
1.068*
(5.98)
b
1
0.111
(0.52)
0.275
(1.014)
0.078
(0.52)
0.327
(3.36)
0.221
(1.70)
0.227
(1.76)
0.247
(1.698)
0.268
(1.59)
Spillovers from ination 2.848*
(3.09)
2.290
(0.75)
2.135*
(2.17)
13.35*
(3.40)
Interest rate 0.246*
(2.47)
0.176*
(2.03)
0.306*
(2.96)
2.607**
(1.62)
Foreign exchange 1.645**
(1.62)
2.336
(1.42)
1.167*
(2.10)
1.502
(1.35)
M1 money supply 0.149
(0.45)
0.85*
(5.64)
0.111
(0.39)
0.525
(1.54)
Industrial production 0.100
(0.44)
0.636
(1.59)
0.108
(0.58)
0.674
(0.59)
Log likelihood 100.80 85.02 110.42 59.54
Diagnostic on standardized and squared standardized residuals
LB(16) 17.45
(0.36)
15.11
(0.52)
16.45
(0.42)
16.73
(0.40)
LB
2
(16) 11.38
(0.78)
11.34
(0.79)
5.046
(0.99)
7.99
(0.95)
Jarque-Bera 0.347
(0.84)
0.15
(0.93)
0.84
(0.66)
2.58
(0.27)
Note: * and ** indicate the rejection of the null hypothesis at the 1% and 5% signicance levels, respectively.
The values inside the parenthesis represent the robust t-statistics. o
1
and o
2
are the coecients of the rst and
second order autoregressive process specied for the mean equations. b
1
is the measure of the volatility
persistence. a
1
and a
2
are the measure of the autoregressive conditional heteroskedasticity (ARCH) eect.
LB(16) and LB
2
(16) are the Ljung-Box statistics applied on the standardized and squared standardized
residuals respectively. Jarque-Bera represents normality test results with the p-values inside the parentheses.
Macroeconomic variables on Istanbul stock exchange 993
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