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**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,

inﬂation, 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

inﬂation, interest rate to all stock price indexes. There are spillovers from

M1 money supply to ﬁnancial 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 inﬂation, interest rate, money

supply, industrial production and exchange rate

have signiﬁcant 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, it’s important to

study the eﬀect of macroeconomic variables on

stock markets.

The relationship between inﬂation and stock prices

has been generally theorized negative (Fama, 1981;

Chen et al., 1986; Wongbangpo and Sharma, 2002).

Inﬂation 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 inﬂation.

The relationship between stock price and nominal

interest rate reﬂects 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 aﬀects the

value of assets. Speciﬁcally, 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 aﬀect stock prices

through the changes in portfolio substitution or

inﬂationary expectations. Since the inﬂation 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

aﬀects equity prices (Dhakal et al., 1993).

Depreciation of currency of a country leads to

a relative decrease in price of that country’s products

in international markets, an increase in demand for

its export goods, and increase cash ﬂows into the

*Corresponding author. E-mail: buguk@gop.edu.tr

Applied Financial Economics ISSN 0960–3107 print/ISSN 1466–4305 online # 2005 Taylor & Francis

987

http://www.tandf.co.uk/journals

DOI: 10.1080/09603100500120365

Applied Financial Economics, 2005, 15, 987–994

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 aﬀect

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 eﬀect on

expected future cash ﬂows. 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 inﬂation,

interest rates, foreign exchange, industrial production

and money supply are signiﬁcant 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, ﬁnancial, 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 eﬀects

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 ﬁnd causal relationships

from the macroeconomic variables to stock prices.

They observe that the stock prices are negatively

related to inﬂation. 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 inﬂuences on stock market

returns and examine their inﬂuence on asset

pricing. Their ﬁndings 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 eﬀect of

macroeconomic variables on UK stock prices and

ﬁnd that the macroeconomic variables do not aﬀect

stock market prices.

Dhakal et al. (1993) analyse the relationship

between the money supply and share prices for the

United States and ﬁnd 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 ﬁnds

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, inﬂation and

exchange rate and ﬁnds 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, inﬂation and interest

rates in Greece and ﬁnd that the stock prices in ASE

follow inﬂation rather than interest rate movements,

despite the close relationship between inﬂation and

interest rates.

Fama (1981) investigates the relationships between

stock prices and real activity, inﬂation, and money.

He ﬁnds a strong positive correlation between com-

mon stock returns and real variables, such as indus-

trial production, GNP, the money supply, lagged

inﬂation and the interest rate. Rapach (2001) exam-

ines the long run relationship between inﬂation and

real stock prices for 16 industrialized countries and

ﬁnds that an increase in inﬂation does not cause a

sustained real depreciation of share values. Chopin

and Zhong (2001) examine the relationship between

stock returns and inﬂation and they ﬁnd that there

is a negative correlation between stock returns and

inﬂation.

Al-Khazali (2003) investigates short- and long-

term relationship between stock prices, inﬂation and

output for 21 emerging markets. He ﬁnds a negative

relationship between real stock return and inﬂation

in the short term except Malaysia. In the long run,

he ﬁnds a positive relationship between stock returns

and both expected inﬂation and change in the

expected inﬂation.

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,

inﬂation, industrial production, long-term govern-

ment bond rate, and call money rate and ﬁnd 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 ﬁnd 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, inﬂation

and interest rates and ﬁnd a signiﬁcant 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

Fund’s International Financial statistics. The data

for stock price indexes, exchange rate (US dollar),

consumer price index, used as a proxy for the

inﬂation, 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 Dickey–Fuller (ADF) (Dickey and

Fuller, 1979) and Phillips–Perron (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 signiﬁcance, 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 ﬁrst diﬀerences 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

ﬁrst diﬀerence of all the series under consideration is

stationary, thus conﬁrming 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

Inﬂation 5.612 2.056 À0.219 1.704 12.250*

(0.002)

Industrial production 4.510 0.134 À0.182 2.506 2.465

(0.291)

Exchange rate 11.690 2.004 À0.262 1.748 12.046*

(0.002)

Interest rate 4.303 0.405 À0.794 3.499 18.144*

(0.000)

M1 Money supply 22.958 2.071 À0.113 1.630 12.228*

(0.002)

IMKB 100 Index 7.048 2.154 À0.344 1.674 14.598*

(0.001)

Financial index 7.073 2.396 À0.327 1.630 15.675*

(0.000)

Industrial index 7.005 2.013 À0.357 1.743 13.675*

(0.001)

Services 8.942 0.282 À0.182 2.068 2.466

(0.291)

Note: Asterisk (*) denotes the null of normality was rejected at 1% signiﬁcance 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 deﬁnes d

t

to be the month of the

year corresponding to observations t, the seasonal

components can be written as:

s

t

¼

X

k

i¼1

ç

i

cos

2¬id

t

12

þ’

i

sin

2¬id

t

12

!

ð1Þ

This speciﬁcation 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 ¼3 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. Speciﬁcally, percentage changes in

prices are modelled as follows:

R

t

¼ o

0

þ

X

r

i¼1

o

1

R

tÀi

þc

t

ð2Þ

where

c

t

n

tÀ1

$ Nð0, o

2

t

Þ ð3Þ

and:

logðo

2

t

Þ ¼ exp a

0

þ

X

q

i¼1

a

i

gðz

tÀi

Þ þ

X

p

i¼1

b

i

logðo

2

tÀi

Þ

( )

ð4Þ

gðz

t

Þ ¼ ±z

t

þ z

t

ÀE z

t

Â Ã

ð5Þ

where R

t

is natural logarithm of the series, c

t

is

the stochastic error,

t À1

is the information set at

time t À1, o

2

t

is the conditional (time varying)

variance, and z

t

is the standardized residuals (c

t

/o

t

).

Conditional on

t À1

, e

t

is assumed to be normally

distributed with a zero mean and variance o

2

t

.

Equation 2 (the conditional mean equation) is

speciﬁed 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) reﬂects

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

i¼1

b

i

- 1.

That is, if volatility persists after a shock has occurred,

the sum of the b

i

coeﬃcients should be less than 1.

In Equation 5, the second term captures the

ARCH eﬀect, which is similar to the concept behind

the GARCH speciﬁcation. The parameter ± allows for

this ARCH eﬀect to be asymmetric.

2

A statistically

2

If ± ¼0 then a positive shock has the same eﬀect as a negative eﬀect as a negative shock of the same magnitude. If

0 >± >À1, a negative shock increases volatility more than a positive shock and thus, ± measures the asymmetric eﬀect of

shock on volatility. If ± <À1, 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

Inﬂation À3.152* 2.324 2.177* À3.484*** 2.274 7.835***

Industrial production À1.746 À3.624* 0.967 À4.148*** À7.403*** 0.762

Interest rate À1.393 À1.963 À0.704 À1.789 À2.404 À0.559

Money supply À1.266 À0.880 5.045*** À0.758 À1.226 11.162***

Exchange rate À2.119 0.537 3.049*** À2.492 0.568 5.640***

IMKB 100 index À1.131 À1.558 2.301* À0.960 À1.539 2.628***

Financial index 0.983 À1.704 2.003* À0.774 À1.685 2.230*

Industrial index À1.166 À1.789 2.464* À1.026 À1.844 2.788***

Services index À2.535 À2.395 1.110 À2.413 À2.219 1.222

Note: * and *** indicate the rejection of the unit root null hypothesis at the 1% and 10% signiﬁcance levels, respectively.

990 C. Erdem et al.

signiﬁcant ± indicates that an asymmetric eﬀect exists.

Lag truncation lengths, p and q, are determined using

likelihood ratio (LR) tests of alternative speciﬁca-

tions. Based on these tests, EGARCH(1,1) models

are ﬁtted.

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

inﬂation, 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:

logðo

2

spi,t

Þ ¼ exp

a

0

þa

1

gðz

spi,tÀ1

Þ þb

1

logðo

2

spi,tÀ1

Þ

þs

1

logðU

int,t

Þ þs

2

logðU

inf ,t

Þ

þs

3

logðU

exh,t

Þ þs

4

logðU

M1,t

Þ

þs

5

logðU

inp,t

Þ

8

>

>

>

>

>

<

>

>

>

>

>

:

9

>

>

>

>

>

=

>

>

>

>

>

;

ð6Þ

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, inﬂation,

exchange rate, M1 money supply and industrial

production, respectively, and z

spi,tÀ1

is the lagged

standardized residuals for stock price index.

Existence of volatility spillover is indicated by the

statistical signiﬁcance of s

1

through s

5

. Statistical

inference regarding these parameters (the s’s)

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:

LðÂÞ ¼ ðÀT,2Þ logð2¬Þ À0.5

X

T

t¼1

logðo

2

t

Þ ð7Þ

where Â 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 LðÂÞ.

IV. Results

All models were determined to be best ﬁt by

EGARCH(1,1) speciﬁcation. The resulting models

are presented in Table 3. The degree of volatility

persistence (as measured by b

1

) is statistically signiﬁ-

cant for inﬂation, 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 eﬀect

parameters are statistically signiﬁcant and the length

of persistence appears to be shorter.

The asymmetric eﬀect parameter ± is signiﬁcant

for IMKB 100, ﬁnancial, inﬂation and industrial

production. The sign on the coeﬃcient is positive

except for industrial production, suggesting that

a positive shock does not have the same eﬀect 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 inﬂation, 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 signiﬁcant in several cases, conﬁrming the

signiﬁcance 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 inﬂation,

interest rate to all indexes except inﬂation to

ﬁnancial index, exchange rate volatility spillovers

into both IMKB 100 and industrial indexes and M1

money supply volatility spillovers only to ﬁnancial

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

Coeﬃcients 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

À0.237*

(À2.681)

À0.193*

(À2.128)

À0.309*

(À3.659)

À0.241**

(À1.93)

À0.713*

(À7.942)

À0.359*

(À3.686)

À0.585*

(À6.203)

0.169*

(2.761)

0.388*

(4.888)

a

0

À3.466*

(À2.951)

À3.884*

(À4.011)

À3.006*

(À2.643)

À5.212*

(À4.38)

À2.232*

(À1.919)

À0.532*

(À2.865)

À1.336*

(À4.582)

À12.090*

(À52.73)

À2.412*

(À2.142)

a

1

0.311**

(1.755)

(0.455)*

(2.033)

0.226**

(1.791)

0.649*

(2.872)

À0.196

(À1.347)

0.335*

(2.473)

0.864*

(3.113)

0.243*

(2.790)

À0.275*

(À1.925)

b

1

0.216

(0.758)

0.214

(1.437)

0.277

(0.946)

À0.114

(À0.39)

0.707*

(5.402)

0.934*

(29.047)

0.900*

(19.629)

À0.919*

(À30.83)

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)

À0.391*

(À3.515)

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% signiﬁcance levels, respectively. The values

inside the parentheses represent the robust t-statistics. o

1

and o

2

are the coeﬃcients of the ﬁrst and second order autoregressive

process speciﬁed 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) eﬀect. 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

Coeﬃcients 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)

À0.083*

(À2.47)

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) À0.240*

(À2.91)

À0.171*

(À2.00)

À0.354*

(À4.87)

À0.232*

(À2.36)

À0.419*

(À6.93)

À0.381*

(À17.81)

À0.501*

(À6.18)

0.128

(1.54)

0.436*

(5.63)

Intercept

(Variance)

À3.736*

(À3.05)

0.012*

(4.73)

À2.660*

(À2.36)

0.013*

(4.66)

0.0004*

(9.49)

0.006*

(4.01)

À1.889*

(À3.88)

À10.125*

(À4.31)

0.005*

(4.56)

SIN1 0.088

(0.51)

0.004

(0.93)

À0.036

(À0.23)

0.002

(0.70)

0.0002*

(5.26)

À0.001

(À0.72)

0.128

(1.04)

0.954*

(2.55)

0.004*

(2.28)

SIN2 À0.061

(À0.42)

0.002

(0.65)

0.033

(À0.236)

0.007*

(2.04)

À0.0003*

(À7.19)

0.002**

(1.82)

À0.319**

(À1.78)

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)

À0.001

(À0.62)

0.093

(À0.63)

À0.182

(À0.77)

0.002*

(2.58)

COS1 0.416*

(2.61)

0.006*

(2.11)

0.312*

(2.11)

0.012*

(3.00)

À0.0004*

(À7.24)

0.001

(0.78)

0.148

(1.37)

0.318

(0.94)

0.002**

(1.83)

COS2 À0.141

(À0.99)

0.001

(0.04)

0.136

(À0.97)

0.002

(0.77)

0.0002*

(3.67)

0.001

(0.34)

À0.127

(À0.83)

0.291

(0.92)

À0.001

(À1.17)

COS3 À0.139

(À0.87)

0.001

(0.52)

À0.310**

(À1.81)

À0.002

(À0.69)

À0.00001

(À0.17)

0.005*

(3.31)

0.141

(0.54)

0.019

(0.07)

À0.002

(À1.49)

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% signiﬁcance levels, respectively.

992 C. Erdem et al.

EGARCH models with spillover eﬀects are correctly

speciﬁed.

V. Conclusions

This study examines whether there is volatility

spillover from inﬂation, interest rate, exchange rate,

M1 money supply and industrial production to

Istanbul Stock Exchange’s 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 signiﬁcant unidirectional spillover from macroeco-

nomic variables to stock price indexes. There are

negative volatility spillovers from inﬂation 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 inﬂation. In terms of interest rate, our

ﬁndings disagree with the ﬁndings of Wongbangpo

and Sharma for Philippines, Singapore and

Thailand and agree with some authors’ ﬁndings 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

À0.281*

(À3.27)

À0.376*

(À4.94)

À0.131

(À1.57)

À0.264*

(À5.05)

a

0

À4.000*

(À4.47)

À3.072*

(À2.82)

À5.096*

(À7.98)

À6.973*

(À18.40)

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)

À0.078

(À0.52)

À0.327

(À3.36)

± 0.221

(1.70)

0.227

(1.76)

0.247

(1.698)

0.268

(1.59)

Spillovers from inﬂation À2.848*

(À3.09)

À2.290

(À0.75)

À2.135*

(À2.17)

13.35*

(3.40)

Interest rate 0.246*

(2.47)

0.176*

(2.03)

0.306*

(2.96)

À2.607**

(À1.62)

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)

À0.85*

(À5.64)

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% signiﬁcance levels, respectively.

The values inside the parenthesis represent the robust t-statistics. o

1

and o

2

are the coeﬃcients of the ﬁrst and

second order autoregressive process speciﬁed 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) eﬀect.

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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