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**The Effects of Macroeconomics Variables on Stock Returns: Evidence from Turkey
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Ahmet Büyükşalvarcı Department of Business, University of Selcuk, Konya, Turkey E-mail: asalvarci@selcuk.edu.tr Tel: +90 507 379 29 49 Abstract The aim of this paper is to analyze the effects of macroeconomic variables on the Turkish Stock Exchange Market in the Arbitrage Pricing Theory framework. This study embraces seven macroeconomic variables (consumer price index, money market interest rate, gold price, industrial production index, oil price, foreign exchange rate and money supply) and the main Turkish stock market Index (Istanbul Stock Exchange Index-100). The data are monthly and extend from the January of 2003 to the March of 2010. A multiple regression model is designed to test the relationship between the ISE-100 Index returns and seven macroeconomic factors. The results of the paper indicate that interest rate, industrial production index, oil price, foreign exchange rate have a negative effect on ISE-100 Index returns while money supply positively influence ISE-100 Index returns. On the other hand, inflation rate and gold price do not appear to have any significant effect on ISE-100 Index returns. Keywords: Arbitrage Pricing Theory, Macroeconomic Variables, Stock Returns, Turkish Stock Exchange

1. Introduction

Capital markets play an important role in the financial sector of each economy. An efficient capital market can promote economic growth and prosperity by stabilizing the financial sector and providing an important investment channel that contributes to attract domestic and foreign capital. Capital market efficiency means the unanticipated portion of the return on a security is unpredictable, and over a sufficient number of observations, does not differ systematically from zero. The unanticipated portion is the actual return less what was expected based on some fundamental analysis. According to Fama (1970), a market is efficient if prices rationally, fully, and instantaneously reflect all relevant available information and no profit opportunities are left unexplained. In an efficient market, past information is of no use in predicting future prices and the market should react only to new information. However, since this is unpredictable by definition, price changes or returns in an efficient market cannot be predicted. Fama (1970) also defined market efficiency in the forms of weak, semi-strong, or strong. The weak-form of market efficiency means the unanticipated return is not correlated with previous unanticipated returns, thus the market has no memory and knowledge of past returns, and they have no bearing on determining future returns. Semi-strong market efficiency means market returns are not correlated with any publicly available information. And lastly, with the strong-form of market efficiency, the unanticipated return is not correlated with any information be it public or insider since all available information is already being reflected in present returns. 404

oil price. Number 3 (2010) In modern portfolio theory. a new law was enacted in 1929 to reorganize the fledgling capital markets under the new name of "Istanbul Securities and Foreign Exchange Bourse". these empirical findings suggest that there are other factors which account for the portion of security returns not captured by beta. the "Regulations for the Establishment and Functions of Securities Exchanges" was published in the Official Gazette. Reinganum (1981). The next year. Lintner (1965) and Mossin (1966) and extended by Huberman (1982). industrial production index. However. foreign exchange rate and money supply. where sensitivity to changes in each factor is represented by a factor-specific beta coefficient. both in regard to the legislative framework and the institutions required to set the stage for sound capital movements.. The remainder of the paper is organized as follows: Section 2 provides information about the ISE. which began to open up their equity to the public. The early phase of the 1980s saw a marked improvement in the Turkish capital markets. multi linear regression method was used. The first securities market in the Ottoman Empire was established in 1866 under the name of "Dersaadet Securities Exchange" following the Crimean War. an equilibrium model for the price determination of risky assets. beta). the mean variance Capital Asset Pricing Model (CAPM) has become the major analytic tool for explaining the relationship between the expected return and risk. Section 4 explains the data and methodology. The aim of this paper is to analyze the effects of macroeconomic variables on the Turkish Stock Exchange Market in the APT framework. Lakonishok and Shapiro (1986) and Coggin and Hunter (1985)) have revealed abnormal returns inconsistent with equilibrium in a market where the CAPM holds. The regulations concerning operational procedures were approved in the parliament and the Istanbul Stock 405 . Those mature shares faced a strong and growing demand from mostly individual investors and some institutional investors. the "Capital Market Law" was enacted. the Bourse became very active and contributed substantially to the funding requirements of new enterprises across the country.European Journal of Social Sciences – Volume 14. The Arbitrage Pricing Theory (APT) developed by Ross (1976) was proposed as an alternative to the CAPM. The APT assumes that the return on asset is a linear function of various macroeconomic factors or theoretical market indices. not just one (e. MacKinlay (1987). The CAPM. The APT states that the realized return on asset is composed of the expected return on that asset at the beginning of a time period and the unexpected realization of k risk factors during that time period plus firm specific risk. the APT is more general than the CAPM since it allows the equilibrium returns of assets to be dependent on many factors. During the industrial drive of the subsequent decades. Gibbons (1982). Dersaadet Exchange also created a medium for European investors who were seeking higher returns in the vast Ottoman markets. Quite a few empirical studies (e. Section 3 reviews the related literature. the final section provides conclusions. Istanbul Stock Exchange Index-100 (ISE-100) is analyzed based on monthly data from January 2003 to March 2010 by seven macroeconomic fundamental indicators. including the Great Depression of 1929 and the impending World War II abroad which had taken their toll in the just developing business world in Turkey. 2. Therefore. The APT is similar to the CAPM in that it is also an equilibrium model. In the analyses of time series.g. In October 1984. the main regulatory body responsible for the supervision and regulation of the Turkish securities market. The macroeconomic variables used in this study are consumer price index.g. there was a continuous increase in the number and size of joint stock companies. History of the Istanbul Stock Exchange (ISE) The origin of an organized securities market in Turkey has its roots in the second half of the 19th century. Following the proclamation of the Turkish Republic. the Capital Markets Board based in Ankara. was established. Soon. its success was clouded by a string of events. Section 5 reports the empirical results. and Chamberlain and Rothschild (1983). money market interest rate. However. was developed by Sharpe (1964). gold price. In 1981. A new decree was issued in October 1983 foreseeing the setting up of securities exchanges in the country.

Number 3 (2010) Exchange (ISE) was formally inaugurated on 26 December 1985 but began its operations on 3 January 1986.634.165 147.075.854 8.062 306.763 229.org Number of Firms 80 82 79 76 110 134 145 160 176 205 228 258 277 285 315 310 288 285 297 304 317 326 321 321 Traded Value (Million $) 13 118 115 773 5.552 116.396 84. bonds and bills. the number of listed companies.770 23. The number of companies traded on the exchange climbed from 80 at the end of 1986 to 321 at the end of 2009.938.357 37.400 70.185 114. To get the listing of a security at exchange.823.651 81. The ISE provides a transparent and fair trading environment not only for domestic participants. Most of the firms (89. The ISE is the only securities exchange in Turkey established to provide trading in equities.858 11. The National Market is the major component of the ISE.614. state-of-the-art technology and strong foreign participation.149 33.503 91. foreign securities and real estate certificates as well as international securities.285 35. There are also Regional.642 300.737 58. which must be at a level to 406 .537 4.ise.72%) are traded at the National Market. and Watch-List Companies Markets. revenue-sharing certificates. at least 3 years must have elapsed since the incorporation date.755 201.567 21.784 2.274 316. but also for foreign issuers and investors. 2 firms in New Economy Market. 11 firms in Watch-List Companies Market.531 5. Another noticeable growth is observed in the trading value. The exchange administration normally determines and approves a financial structure. At the end of 2009.034 181.099.157 205.933.924 919. The ISE is a dynamic and growing emerging market with an increasing number of publicly traded companies. 288 firms are listed in National Market.756 100.099. to over US$ 316 billion in 2009. at least 15% of the paid-in capital must have been publicly offered. trading volume and traded value has increased significantly from 1986 to 2009. Table 1: Developments in ISE from 1986 to 2009 Year 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: www.249 100.913 As seen in Table 1. which has sharply increased from only US$ 13 million in 1986.European Journal of Social Sciences – Volume 14.780 69.685 23.242. private sector bonds. Table 1 provides figures showing the developments of ISE in last twenty-four years.254 390.203 52.814.326 Traded Number of Stocks (Thousand) 3 15 32 238 1. 20 firms in Second National Market. the following conditions are required: the number of shareholders must be above 100.502 8.842 261.251 59.986. The listing requirements for the securities presenting partnership are regulated by both the ISE and the Capital Market Board.934 80. New Companies.793.531 10.104 70.

Roll and Ross (1986) study on the United Kingdom market. inflation. They find oil prices. The indices are: ISE National-All Shares Index. they found a strong relationship between the macroeconomic variables and the expected stock returns during the tested period. market return. consumption and oil prices in the period of Jan 1953-Nov 1984. are significant explaining expected returns.S. industrial production. They note that industrial production. especially to unanticipated news.K. twists in the yield curve. stock returns and apply the APT models. ISE New Economy Market Index and ISE Investment Trusts Index. measure of unanticipated inflation of changes in expected inflation during periods when these variables are highly volatile. Number 3 (2010) enable the company to carry out its activities. Poon and Taylor (1991) parallel the Chen. with the factor generating from the rate of change approach all factors are significant. risk premium. On the other hand. They conclude asset prices react sensitively to economic news. and also to short and long term interest rates. changes in risk premium. Hamao (1988) replicated the Chen. namely default risk. oil prices and market index are not priced by the financial market. ISE 10 Banks Index. unanticipated change in the risk premium and unanticipated change in asset return but they suggest more research was needed. exchange rate. He put on view that the stock returns are significantly influenced by the changes in expected inflation and the unexpected changes in both the risk premium and the slope of 407 . For Japanese stock market. In their research. Review of Literature Many authors have tried to show reliable associations between macroeconomic variables and stock returns. ISE Corporate Governance Index. sector and sub-sector indices. They employed seven macroeconomic variables. Clare and Thomas (1994) investigate the effect of 18 macroeconomic factors on stock returns in the U. industrial production.S. ISE price indices are computed and published throughout the trading session while the return indices are calculated and published at the close of the session only. commodity prices and market portfolio. ISE National-30. change in expected inflation. ISE City Indices. ISE National-100. stock returns. ISE Second National Market Index. They found that consumption. Chen. They suggest that either different macroeconomic factor have an influence on share returns in the United Kingdom or the methodology employed by Chen. The firm is also required to show a profit in the previous 2 consecutive years. Roll and Ross (1986) is inefficient. Roll and Ross (1986) study in the multi-factor APT framework.European Journal of Social Sciences – Volume 14. For the APT model. Having conducted previous research suggest that the variability of stock returns could be explained by unanticipated changes in certain macroeconomic variables mainly: unanticipated change in term structure. unanticipated change in inflation. Roll and Ross (1986) was the first study to select macroeconomic variables to estimate U. Burmeister and Wall (1986) continued down a similar path of research laid down by Chen. Seven macroeconomic and financial factors. A brief overview of the studies focusing on developed and emerging capital markets is presented in this section. The ISE National-100 Index contains both the ISE National-50 and the ISE National-30 Index and is used as a main indicator of the national market. yet negatively to budget and trade deficits. 3. Priestley (1996) prespecified the factors that may carry a risk premium in the U. retail price index.K. They identified several key macroeconomic variables which influenced stock market returns based on the Arbitrage Pricing Theory (APT). Their results show that macroeconomic variables do not appear to affect share returns in the United Kingdom as they do in the U. stock returns are related positively to inflation and growth in money supply. Abdullah and Hayworth (1993) observed that the U. In addition. retail sales. ISE National-50. Roll and Ross (1986). namely: term structure. stock market.S.K. bank lending and corporate default risk to be important risk factors for the U. terms structure of interest rates. money supply unexpected inflation. 44 indices are computed for the stock market.

yet negatively related in Singapore and Thailand. As for short run relationship. To examine the interdependence between stock markets and fundamental macroeconomic factors in the five South East Asian countries (Indonesia. call money rates. money supply. Korea. a production index. Through the APT. Bailey and Chung (1996). crude oil price. Hong Kong. and a residual market error on the Japanese stock market. financial fluctuations. interest rate.European Journal of Social Sciences – Volume 14. Mahmood and Dinniah (2009) examined the dynamics relationship between stock prices and economic variables in six Asian-Pacific selected countries of Malaysia. Philippines. Niarchos and Alexakis (2000) investigated whether it is possible to predict stock market prices with the use of macroeconomic variables in the Athens Stock Exchange. the consumer price index. and Thailand) was the main purpose of Wongbangpo and Sharma (2002). Singapore. gross fixed capital formation. crude oil price and Treasury Bills’ rate have long-run relation with Malaysian stock market. Macroeconomic variables include inflation. i. The result shows that exchange rate and exchange reserve and highly affected the stock prices. Hussain and Ali (2009) examine the relationship between macroeconomics variables and Karachi Stock Exchange in Pakistan context. exchange rates. Korea. the money supply. Maysami and Koh (2000) tested the relationships between the Singapore stock index and selected macroeconomic variables over a seven-year period from 1988 to 1995 and they found that there existed a positive relationship between stock returns and changes in money supply but negative relationships between stock returns with changes in price levels. The statistical evidence suggests that monthly stock prices in the Athens Stock Exchange are positively correlated to those variables.. Singapore. except industrial production index coupled with a positive coefficient. The monthly data on stock price indices. The exchange rate variable is positively related to stock prices in Indonesia. industrial production. Findings of the study show that. Malaysia. They observe that these factors are associated with significant risk premium in Japanese equities.and long-term interest rates and exchange rates. short. Japan. Monthly data from 1985 to 1996 is used in this study to represent GNP. the interest rate. money supply and exchange rate. The results indicate the existing of a long run equilibrium relationship between stock price indices and among variables in only four countries. Loh and Zainudin (2006) look at the dynamic between macroeconomic variables and the Malaysian stock indices (Kuala Lumpur Composite Index) during the period of 1996-2005. Brown and Otsuki (1990) explore the effects of the money supply. Tan. and Thailand induces the positive effect for their stock markets. industrial production index.e. exchange rate movements and political changes on owners of Philippine equities cannot explain Philippine stock returns. industrial production index and whole sales price index. and the exchange rate for the five countries. Japan and Australia. Their results showed that high inflation in Indonesia and Philippines influences the long-run negative relation between stock prices and the money supply. examine the impact of macroeconomic risks on the equity market of the Philippines. They found that the inflation rate. Results indicate that consumer price index. The Hong Kong shows relationship only between exchange rate and stock price while the Thailand reports significant interaction only between output and stock prices. crude oil price and treasury bills are significantly and negatively related to the Kuala Lumpur Composite Index in the long run. Malaysia. while the money growth in Malaysia. consumer price index and industrial production index that spans from January 1993 to December 2002 are used. A research by Kandir (2008) can be considered an example of the APT testing in Istanbul Stock Exchange. all countries except for Hong Kong and Thailand show some interactions. foreign exchange rates. and Philippines. They have used quarterly data of foreign exchange rate. In particular. The time period under investigation was from January 1984 to December 1994 on a monthly basis. Hong Kong and Australia. foreign exchange reserve. Number 3 (2010) the term structure of interest rates. Mohammad. He investigates the role of seven macroeconomic factors in explaining Turkish stock returns 408 . they focused their analysis on the long run equilibrium and short run multivariate causality between these variables. Thailand.

change in consumer price index. An empirical studies by Chen. international crude oil price. His empirical findings reveal that exchange rate. while inflation rate is significant for only three of the twelve portfolios. Consumer Price Index (CPI) Consumer Price Index is used as a proxy of inflation rate. Number 3 (2010) in the period from July 1997 to June 2005. gold price. His findings also suggest that macroeconomic factors have a widespread effect on stock returns.1. Tursoy. gold price. interest rate. Data and Methodology 4. On the other hand. 4. export. Ri is return for month t . Roll and Ross (1986). import.1. unemployment rate and market pressure index) against 11 industry portfolios of Istanbul Stock Exchange to observe the effects of those variables on stocks’ returns. Seven macroeconomic variables. are examined. money market interest rate. Pt and Pt −1 are closing values of ISE-100 Index for month t and t − 1 respectively. It is calculated by using following equation: Rt = ln( Pt ) − ln( Pt −1 ) (1) Where. interest rate. Using ordinary least square technique.2. They tested the APT in Istanbul Stock Exchange for the period of February 2001 up to September 2005 on monthly base. money market interest rate. exchange rate. Barrows and Naka (1994). money supply and oil prices do not appear to have any significant affect on stock returns. Mukherjee and Naka (1995) and Wongbangpo and Sharma (2002) conclude that inflation has negative effects on the stock market. 4. crude oil price. industrial production index. foreign exchange rate and broad money supply is obtained from the database of Central Bank of Republic of Turkey while international crude oil price data come from International Financial Statistics (IMF). industrial production. growth rate of narrowly defined money supply. change in exchange rate. gold price.European Journal of Social Sciences – Volume 14. CPI is chosen as it is a broad base measure to calculate average change in prices of goods and services during a specific period. Istanbul Stock Exchange-100 Index is used as a proxy for the performance of the Turkish stock market. They tested 13 macroeconomic variables (money supply. Inflation is ultimately translated into nominal interest rate and an increase in nominal interest rates increase discount rate which results in reduction of present value of cash flows so it is said that an increase in inflation is negatively related to equity prices. The source used for the dependent variable was Central Bank of Republic of Turkey. These macroeconomic variables are consumer price index. Explanatory Variables and Hypotheses 4. Macroeconomic variables used in his study are growth rate of industrial production index. they observed that there are some differences among the industry sector portfolios. growth rate of international crude oil price and return on the MSCI World Equity Index and the analysis is based on stock portfolios rather than single stocks. foreign exchange rate and broad money supply. since characteristic portfolios do not seem to be influenced in a different manner by the macroeconomic variables. gross domestic product. Gunsel and Rjoub (2008) is another example of the APT test in Turkish stock market. foreign reserve. as price stability is one of the macroeconomic 409 . interest rate and world market return seem to affect all of the portfolio returns. The data for the explanatory variables. that are hypothesized to influence stock returns. The dependent variable used is Istanbul Stock Exchange-100 Index (ISE-100) returns. consumer price index. namely consumer price index. industrial production.2. Data Description and Variable Definitions The aim of this study is to explain the effects of macroeconomic variables on the stock returns in Turkey using monthly data from January 2003 to March 2010. industrial production index. Nonetheless.

an increase in oil price will lead to an increase in production costs and hence to decreased future cash flow. a negative relationship is expected between gold price and stock returns. Mukherjee and Naka (1995). Money Supply (M2) Broad Money (M2) is used as a proxy of money supply. The intuition regarding the relationship between interest rates and stock prices is well established.2.2. As a result.2. Thus.6.4. the volume of imports would increase. 410 . products imported become more expensive. Loh and Zainudin (2006) and Kandir (2008) found a negative sign. currency depreciation will have an unfavorable impact on a domestic stock market. Thus it is expected that an increase in industrial production index is positively related to stock returns. Hypothesis 7: There is a positive effect of money supply on ISE-100. Hypothesis 5: There is a negative effect of oil price on ISE-100. Gold Price (GLD) Bullion price is used as a proxy of gold price. 4. Turkish investors tend to invest less in stocks. Hypothesis 2: There is a negative effect of money market interest rate on ISE-100.2. Ibrahim and Aziz (2003) found a positive sign. Maysami and Koh (2000) found a positive sign. Gold is an alternative investment tools for Turkish investors. 4.2. Therefore. oil price play an important role in Turkey economy. 4. Foreign Exchange Rate (FEX) In this study end of month US Dollars/Turkish Lira exchange rate is employed as foreign exchange rate. Increase in money supply leads to increase in liquidity that ultimately results in upward movement of nominal equity prices.2. Oil Price (OIL) Brent oil price is used as proxy for oil price. Industrial Production Index (IPI) Industrial Production Index is used as proxy to measure the growth rate in real sector. Hypothesis 3: There is a negative effect of gold price on ISE-100. For oil importer countries. suggesting that an increase in interest rates increases the opportunity cost of holding money and thus substitution between stocks and interest bearing securities and hence falling stock prices.5. Hypothesis 4: There is a positive effect of industrial production index on ISE-100. Tan. Therefore. Hypothesis 6: There is a negative effect of foreign exchange rate on ISE-100.S. As the gold price rises. which in turn causes lower cash flows.European Journal of Social Sciences – Volume 14. we believe that the effect of inflation on stock price is insignificant. Money Market Interest Rate (MIR) One-month time deposit rate is used as a proxy of money market interest rate. 4. For an import dominated country.7. Turkey is a net importer of oil.3. dollar. Turkey is an import dominated country. Thus. a negative relationship is expected between foreign exchange rate and stock returns. therefore. Industrial production presents a measure of overall economic activity in the economy and affects stock prices through its influence on expected future cash flows. causing stock prices to fall.2. Mukherjee and Naka (1995). Maysami and Koh (2000). Roll and Ross (1986). leading to a negative impact on the stock market. As the Turkey’s currency depreciates against the U. Chen. Ibrahim and Aziz (2003) found a negative sign. 4. profits and the stock price of the domestic companies. Hypothesis 1: There isn’t any significant effect of consumer price index on ISE-100. Number 3 (2010) policy objectives by the Turkish government and also an expected target of the Turkish citizens. 4. a positive relationship is expected between money supply and stock returns. if the demand for these goods is elastic. a change in nominal interest rates should move asset prices in the opposite direction.

1808 -0. namely consumer price index (CPI).0836 0. money market interest rate (MIR).0007 -0. More precisely.0101 Mean 0. (Vi )t and (Vi )t −1 are the level of variable i for month t and t − 1 respectively.1985 3. IPI and OIL have a negative skewness.1724 0.0206 0.0234 Median 0.2839 -0. As it can be seen from the Table 2.0000* 86 ISE CPI MIR GLD IPI OIL 0.9687 43.0294 0.2357 0.0000* 86 M2 0.0073 -0.6717 0. Number 3 (2010) Before the empirical analysis.0023* 0. Econometric Model Different methods have been employed to test the relationships between macroeconomic variables and stock prices.2502 Maximum -0.0791 Jarque-Bera 0.2709 2. containing sample means. 5. OIL.0873 37. gold price (GLD). This model was useful and suitable because the research focus lied in examining the contemporaneous relationships between stock returns and changes in macroeconomic variables.0071 -0.0509 0. kurtosis as well as the Jarque-Bera statistics and probabilities (p-values).1. maximums.0187 0.1129 1.0154 0.2772 -0.2238 0.0127 0.0071 0. IPI .2294 1.0256 0. this study hypothesize the model between ISE-100 index (ISE) and seven macroeconomic variables. skewness. whereas the ordinary calculations in Excel.1795 0.2752 0. The hypothesized model is represented as follows: ISE = f (CPI . international crude oil price (OIL). Empirical Results Various descriptive statistics are calculated of the variables under study in order to describe the basic characteristics of these variables.0908 -0. standard deviations. foreign exchange rate (FEX) and money supply (M2).0474 0. MIR.3887 315.0000* 0.5002 Kurtosis 12.0078 0.7015 12. Table 2 presents the descriptive statistics of the data.2093 -0.0139 -0. minimums.0000* Probability 86 86 86 86 86 86 Observation Note: Asterisk (*) denotes the null of normality was rejected at 1% significance level.2129 -0. Table 2: Descriptive Statistics of Study Variables FEX -0.0790 0.0495 -1.9296 6.0392 1.0270 Skewness 4. medians. indicating the fat tails on the right-hand side of the distribution comparably with the left-hand side.1172 0.5806 0. ISE. On contrary.4320 4.0012 -0. FEX .6517 8.0878 0. This study examined the effects of macroeconomic variables on ISE-100 index by using a multiple regression model.0191 0.4544 Minimum 0.1159 Std.0048 0.5452 5.0116 -0. skewness is positive for five series.0135 0.3. GLD.0028 0. Dev.2248 0. all the variables are asymmetrical.0008 0. Based on both theoretical and empirical literature reviewed.0444 0.European Journal of Social Sciences – Volume 14. M 2 ) (3) In order to see whether the above identified macroeconomic factors could explain ISE-100 index returns. 4. The ordinary least squares (OLS) method is used to compute the estimates of the regression model stated above and all estimations have been performed in the econometrical software program EViews 5. industrial production index (IPI). which indicates the 411 .4994 0. all explanatory variables explained above are converted to a monthly continuous increase rate by taking their first logarithmic differences: G (Vi )t = ln (Vi )t − ln (Vi )t −1 (2) Where.1265 -0. -0. G (Vi )t is the continuous growth (change) of variable i month t .2345 0. the multiple regression model is formed: ISEt = β 0 + β 1CPI t + β 2 MIRt + β 3 GLDt + β 4 IPI t + β 5 OILt + β 6 FEX t + β 7 M 2 t + ε t (4) In the above equation β 0 is constant and β is coefficient of variables while ε t is the residual error of the regression.9166 5.3292 139.

304555 -0.063283* (0) -7.979582* (0) -7. Table 4: Variables ISE CPI MIR GLD IPI OIL Unit Root Test Results (ISE-100 Index and Macroeconomic Variables) ADF Unit Root Test (at level) Intercept Trend and Intercept -6.897419* (3) -7. If more than one of them is correlated with other.108168* (12) -5. So the descriptive statistics shows that the values are not normally distributed about its mean and variance or other word we can says no randomness in data and therefore. The optimal lag lengths for the ADF test were chosen based on the Schwarz Information Criterion (SIC). This indicated that individual investor can earn considerably higher normal rate of profit from the Istanbul Stock Market.132111 0. the results clearly show that none of the independent variables are highly correlated and no multicollinearity amongst independent variables exist.829561* (2) -7. The calculated Jarque-Bera statistics and corresponding p-values are used to test for the normality assumption.889129* (2) -5.190213 1 0.537952 0. in excess of 0.178430* (0) -8. Logic behind assumption of no multicollinearity is simple that if two or more independent variables are linearly dependent on each other.836004* (0) -6.483615* (1) 412 . Number 3 (2010) fat tails on the left-hand side of the distribution.003420 MIR 1 -0.147378* (10) -8. multicollinearity is said to exist. one of them should be included instead of both.127243* (0) -7.028674 -0.8.019714* (0) -5. The ADF and PP unit root tests results are presented in Table 4.412403 1 0.187228* (12) -7. Since the highest correlation numbers are lower than 0. The funds of market are not allocated to the productive sector of the economy. One of the basic assumptions of Ordinary Least Square (OLS) method is that regressors are not mutually correlated. The correlation analysis results are reported in Table 3.113995 -0.079565 0.494260* (0) PP Unit Root Test (at level) Intercept Trend and Intercept -6. Based on the Jarque-Bera statistics and p-values this assumption is rejected at 1 percent level of significance for all variables. Kurtosis value of all variables also shows data is not normally distributed because values of kurtosis are deviated from 3. it is based on the automatic selection procedure of Newey-West (1994) for Bartlett Kernel. In order to check multicollinearity among independent variables. The Augmented Dickey-Fuller (ADF) (Dickey and Fuller.153225 1 -0. it is necessary to investigate the time series properties of the variables by utilizing unit root tests.922254* (0) -5.080906 0.22153* (3) -12. So the results of above descriptive statistics raise the issue the inefficiency of market.081770* (10) -7.844574* (0) -7. Table 3: CPI MIR GLD IPI OIL FEX M2 Pearson Coefficient of Correlation Matrix CPI 1 0. A suggested rule of thumb is that if the pair wise correlation between two regressors is very high. a correlation analysis has been performed.60732* (2) -7. 1981) and Phillips-Perron (PP) (Phillips and Perron. with the only three exceptions being the monthly variables in CPI.8.409842 1 Most macroeconomic time series data are often assumed to be non-stationary and thus it is necessary to perform a pretest to ensure there is a stationary cointegrating relationship among variables to avoid the problem of spurious regression.536928* (0) -7. being sensitive to speculation shows periodic change. multicollinearity may pose serious problem.170425 0. 1988) unit root tests have been performed in this study in order to check whether the time series are stationary or not.526939* (1) -7.006772 GLD IPI OIL FEX M2 1 0.074678* (4) -12.044237 0.European Journal of Social Sciences – Volume 14.291028 -0.142287 -0.823720* (2) -6. 1979.029812* (4) -7.0036774 -0.310714 0. while for the PP test. Before proceeding with the OLS estimations.064292 0.269277 0. GLD and IPI.

005748 0. foreign exchange rate (FEX). In other words.07.55919 F-Statistic 0.0914*** 0.203693 -5.471049) suggest that model serves its purpose in determining the effect of macroeconomic variables on stock price index. As a rule of thumb.264688 1.009238 0.952291 -0. Asterisk (*) indicates rejection of the null hypothesis of non-stationary at the 1% level.000000 Prob(F-statistic) Note: Asterisks (*) and (***) indicates significance at 1% and 10% respectively. representing in parenthesis.16 for trend and intercept respectively. The DW statistic in our output is 2. 2. MacKinnon (1996) critical values are used for ADF and PP tests. As it can be seen from the Table 4. The proper lag order for ADF test is chosen by considering Schwarz Information Criterion (SIC).0043* 0.043410 2. For PP tests.518399 0.0000* 0.312872* (2) -9. because the test statistics are more negative than the critical values and therefore t-statistics are lying in the rejection of the null area.276278* (0) -9. in the levels form both tests results clearly show that the null hypothesis of the existence of a unit root is rejected at 1% significance levels in the examined time series. money supply (M2). In this matter.5356 0. Variables Constant CPI MIR GLD IPI OIL FEX M2 As Table 5 reports that the values of adjusted R Square (0. 5% and 10% critical value for the ADF and PP tests is -3.471049 Adjusted R2 2. gold price (GLD).127957 0. Number 3 (2010) FEX -7. the hull hypothesis of a unit root can be rejected in both the ADF and PP tests. This means that the market evaluates inflation figures nearly correct before the announcement of the actual rate.8568 0. More precisely. -3.89 and -2. Error t-Statistic 0.050670 -1. The 1%. 413 .191005 -1. the bandwidth is chosen using Newey–West method and spectral estimation uses Bartlett kernel. the effect of macroeconomic variables on the ISE-100 index returns is examined by Ordinary Least Square (OLS) estimation.51 and -2.46 and -3. According to the test results.281899* (3) Notes: 1.082400 -0.59 for intercept and -4.0546*** 0.181070 -0. industrial production index (IPI).657051 0.622242 0.181382 -1.013741 Durbin-Watson 11.310092 0. Durbin-Watson (DW) statistic can show us the serial correlation of residuals. Table 5: Regression Analysis Result (Dependent Variable: ISE) Probability 0. we reject the null that all coefficients are simultaneously zero and accept that the regression is significant overall. PP is the Phillips-Perron and ADF is the Augmented Dickey-Fuller test. 3. money market interest rate (MIR). 4. all of the series are accepted not to contain unit root.000) for the OLS regression. Having concluded that all of the series are stationary. representing in parenthesis. if the DW statistic is less than 2.144043* (7) -6. OLS estimation results using Newey-West autocorrelation estimator are reported in Table 5.515659 R2 0. With computed F-value of 11.206744 0.228944* (0) -9.947654 -1.118972 0. and white noise of residuals.11% variability of the stock price index return can be explained by the consumer price index (CPI).222316* (1) -7. oil price (OIL). there is evidence of positive serial correlation.077621 0.351448* (1) -6. 47.958527 0.098923 0.55919 (p<0. one should look at the diagnostics of regression. consumer price index (CPI) does not have any effect on ISE-100 index returns at 10% significant level. Before analyzing the coefficients. 5.709606 -0.2825 0.0538*** Coefficient Std.013741 and this result confirms that there is no serial correlation. This is not surprising since as specified before price stability is one of the macroeconomic policy objectives by the Turkish government and also an expected target of the Turkish citizens.156860* (8) M2 -9.European Journal of Social Sciences – Volume 14.034275 0.

An interesting point in the results of the study is the relationship observed between industrial production index and ISE-100 index returns. Money supply (M2) has a significant and positive effect on ISE-100 index returns. foreign exchange rate and broad money supply. To sum up our results. oil price (OIL). Some of these studies found that changes in macroeconomic variables lead the changes in stock markets and that stock prices can be predicted by means of publicly available information such as time series data on financial and macroeconomic variables. oil price (OIL) is negatively related to ISE-100 index returns and significant at 1% level.European Journal of Social Sciences – Volume 14. Some of these studies have focused on the relationship between stock market prices and fundamental economic activities. causing stock prices to fall. As expected. since gold is another alternative investment tools for Turkish investors. Conclusions Many studies have been conducted to explore the variation of financial markets to macroeconomic variables theoretically and empirically. Gold price (GLD) does not seem to be a significant factor for ISE-100 index returns. gold price. that are hypothesized to influence stock returns. Number 3 (2010) As expected. investors tend to invest less in stocks. In the regression models. the ISE-100 index returns are used as dependent variables. foreign exchange rate have a negative effect on ISE-100 Index returns. This result indicates that in Turkey. thus affect stock returns. industrial production index. oil is important factor in determining the production cost of the firms. while the macroeconomic variables are used as independent variables. money market interest rate. changes in money supply appear to influence both the equilibrium in the financial asset markets and the real economic variables. Thereby. 5. industrial production index. The results of the paper indicate that interest rate. On the other hand. These macroeconomic variables are consumer price index. Changes in money supply would alter the money market equilibrium or would impact real economic variables. On the other hand. industrial production index (IPI). in Turkish case. This statistical insignificance is surprising. Seven macroeconomic variables. money supply appears to be related with Turkish stock returns. The main objective of the present paper is to explain the effect of macroeconomic variables on the stock returns in Turkey using monthly data from January 2003 to March 2010. consumer price index (CPI) and gold price (GLD) do not appear to have significant effects on stock returns. interest rate (MIR) has a significant and negative effect on ISE-100 index returns. As the interest rate rises. are examined. According to the test results. oil price. The relationship between exchange rates and stock prices was hypothesized to be negatively related. international crude oil price. The outcome of these studies varies greatly regarding the effect of changes of macroeconomic variables on stock prices. 414 . This indicates that interest rate represents alternative investment opportunities. A multiple regression model is designed to test the relationships between the ISE-100 index returns and seven macroeconomic factors. This relationship was found to exist between exchange rate (FEX) and ISE-100 index returns at 1% significant level. Istanbul Stock Exchange-100 Index (ISE-100) is used as a proxy for the performance of the Turkish stock market. The effect of industrial production index (IPI) on ISE-100 index returns is statistically significant as expected. showing that a depreciation of the Turkish currency in terms of US Dollars would have a favorable impact on the Turkish stock market. money market interest rate (MIR). foreign exchange rate (FEX) and money supply (M2) seem to effect the Istanbul Stock Index-100 (ISE-100) returns. while money supply positively influence ISE-100 Index returns. but with the wrong sign. inflation rate and gold price do not appear to have any significant effect on ISE-100 Index returns.

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