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European Journal of Social Sciences – Volume 14, Number 3 (2010

)

The Effects of Macroeconomics Variables on Stock Returns:
Evidence from Turkey

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

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

At the end of 2009.924 1997 258 58. which must be at a level to 406 . Most of the firms (89. at least 15% of the paid-in capital must have been publicly offered. private sector bonds.357 306.034 5. the following conditions are required: the number of shareholders must be above 100.72%) are traded at the National Market. at least 3 years must have elapsed since the incorporation date.634. The number of companies traded on the exchange climbed from 80 at the end of 1986 to 321 at the end of 2009.938. trading volume and traded value has increased significantly from 1986 to 2009.793.099.784 1998 277 70.062 1995 205 52.537 1991 134 8.400 23. 11 firms in Watch-List Companies Market. which has sharply increased from only US$ 13 million in 1986.756 33. Number 3 (2010) Exchange (ISE) was formally inaugurated on 26 December 1985 but began its operations on 3 January 1986. There are also Regional. 20 firms in Second National Market. To get the listing of a security at exchange. The National Market is the major component of the ISE. foreign securities and real estate certificates as well as international securities.986.823.249 1994 176 23.165 59.274 114. Table 1 provides figures showing the developments of ISE in last twenty-four years.254 1996 228 37.567 10. The ISE provides a transparent and fair trading environment not only for domestic participants.242.763 81. to over US$ 316 billion in 2009.770 35.203 100.251 2003 285 100. The ISE is a dynamic and growing emerging market with an increasing number of publicly traded companies. bonds and bills.780 2004 297 147.934 11. 2 firms in New Economy Market.913 Source: www. revenue-sharing certificates.ise.842 116.502 4.531 1992 145 8.651 2005 304 201.185 2008 321 261.552 2007 326 300. and Watch-List Companies Markets. New Companies.685 2001 310 80. but also for foreign issuers and investors.326 205. The ISE is the only securities exchange in Turkey established to provide trading in equities.157 2009 321 316.814.075.396 2.104 919. The exchange administration normally determines and approves a financial structure.149 2002 288 70.933. The listing requirements for the securities presenting partnership are regulated by both the ISE and the Capital Market Board.737 390.854 1.642 91.503 2006 317 229.614. Another noticeable growth is observed in the trading value.European Journal of Social Sciences – Volume 14.755 69. Table 1: Developments in ISE from 1986 to 2009 Traded Number of Stocks Year Number of Firms Traded Value (Million $) (Thousand) 1986 80 13 3 1987 82 118 15 1988 79 115 32 1989 76 773 238 1990 110 5.285 1993 160 21.org As seen in Table 1.531 1999 285 84. 288 firms are listed in National Market. the number of listed companies.858 2000 315 181. state-of-the-art technology and strong foreign participation.099.

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

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

The dependent variable used is Istanbul Stock Exchange-100 Index (ISE-100) returns. Nonetheless. 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. 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. Mukherjee and Naka (1995) and Wongbangpo and Sharma (2002) conclude that inflation has negative effects on the stock market. Tursoy. Macroeconomic variables used in his study are growth rate of industrial production index. Istanbul Stock Exchange-100 Index is used as a proxy for the performance of the Turkish stock market. Pt and Pt −1 are closing values of ISE-100 Index for month t and t − 1 respectively. gold price. gold price. they observed that there are some differences among the industry sector portfolios. foreign reserve. gold price. Number 3 (2010) in the period from July 1997 to June 2005. while inflation rate is significant for only three of the twelve portfolios. international crude oil price. The data for the explanatory variables. are examined. 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). that are hypothesized to influence stock returns. Consumer Price Index (CPI) Consumer Price Index is used as a proxy of inflation rate. His empirical findings reveal that exchange rate. 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. since characteristic portfolios do not seem to be influenced in a different manner by the macroeconomic variables. consumer price index. interest rate. 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. money market interest rate. money supply and oil prices do not appear to have any significant affect on stock returns. Gunsel and Rjoub (2008) is another example of the APT test in Turkish stock market. namely consumer price index. unemployment rate and market pressure index) against 11 industry portfolios of Istanbul Stock Exchange to observe the effects of those variables on stocks’ returns. crude oil price. import. as price stability is one of the macroeconomic 409 . On the other hand. 4. industrial production. money market interest rate. gross domestic product. The source used for the dependent variable was Central Bank of Republic of Turkey. Using ordinary least square technique. Data and Methodology 4. interest rate. interest rate and world market return seem to affect all of the portfolio returns. industrial production index. 4. It is calculated by using following equation: Rt = ln( Pt ) − ln( Pt −1 ) (1) Where.1. They tested 13 macroeconomic variables (money supply. Roll and Ross (1986). These macroeconomic variables are consumer price index.2. growth rate of narrowly defined money supply. industrial production.2. They tested the APT in Istanbul Stock Exchange for the period of February 2001 up to September 2005 on monthly base. exchange rate. Explanatory Variables and Hypotheses 4. industrial production index. His findings also suggest that macroeconomic factors have a widespread effect on stock returns. Barrows and Naka (1994). Ri is return for month t . change in consumer price index. foreign exchange rate and broad money supply. change in exchange rate. Seven macroeconomic variables. export.1. An empirical studies by Chen.

4. we believe that the effect of inflation on stock price is insignificant. Tan. an increase in oil price will lead to an increase in production costs and hence to decreased future cash flow.4. Oil Price (OIL) Brent oil price is used as proxy for oil price. therefore.5. Turkey is a net importer of oil. Therefore.2. Mukherjee and Naka (1995). a negative relationship is expected between gold price and stock returns. a positive relationship is expected between money supply and stock returns. the volume of imports would increase. 410 . Money Supply (M2) Broad Money (M2) is used as a proxy of money supply. oil price play an important role in Turkey economy. 4.2. As a result. Ibrahim and Aziz (2003) found a negative sign. Thus. Therefore. 4. a negative relationship is expected between foreign exchange rate and stock returns.7.6. Industrial production presents a measure of overall economic activity in the economy and affects stock prices through its influence on expected future cash flows. Turkey is an import dominated country. which in turn causes lower cash flows. Mukherjee and Naka (1995). Number 3 (2010) policy objectives by the Turkish government and also an expected target of the Turkish citizens.European Journal of Social Sciences – Volume 14. Hypothesis 3: There is a negative effect of gold price on ISE-100. Hypothesis 6: There is a negative effect of foreign exchange rate on ISE-100. a change in nominal interest rates should move asset prices in the opposite direction.2. As the Turkey’s currency depreciates against the U. 4. Hypothesis 1: There isn’t any significant effect of consumer price index on ISE-100. causing stock prices to fall. Ibrahim and Aziz (2003) found a positive sign. For an import dominated country. The intuition regarding the relationship between interest rates and stock prices is well established. if the demand for these goods is elastic. products imported become more expensive. 4. Chen. Foreign Exchange Rate (FEX) In this study end of month US Dollars/Turkish Lira exchange rate is employed as foreign exchange rate. profits and the stock price of the domestic companies. Loh and Zainudin (2006) and Kandir (2008) found a negative sign. For oil importer countries. 4. Turkish investors tend to invest less in stocks.3.2. dollar. Hypothesis 2: There is a negative effect of money market interest rate on ISE-100. Maysami and Koh (2000). Roll and Ross (1986).2. Thus. currency depreciation will have an unfavorable impact on a domestic stock market. As the gold price rises. Hypothesis 4: There is a positive effect of industrial production index on ISE-100. Money Market Interest Rate (MIR) One-month time deposit rate is used as a proxy of money market interest rate. Increase in money supply leads to increase in liquidity that ultimately results in upward movement of nominal equity prices. 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. Industrial Production Index (IPI) Industrial Production Index is used as proxy to measure the growth rate in real sector. Thus it is expected that an increase in industrial production index is positively related to stock returns. Gold Price (GLD) Bullion price is used as a proxy of gold price.2.2.S. Hypothesis 5: There is a negative effect of oil price on ISE-100. Maysami and Koh (2000) found a positive sign. leading to a negative impact on the stock market. Gold is an alternative investment tools for Turkish investors. Hypothesis 7: There is a positive effect of money supply on ISE-100.

whereas the ordinary calculations in Excel. maximums. Based on both theoretical and empirical literature reviewed. all the variables are asymmetrical.0078 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. MIR. 4.9166 Kurtosis 4.0878 -0.2345 43. industrial production index (IPI).7015 12.6517 0.0023* 0.0191 0. Table 2 presents the descriptive statistics of the data. indicating the fat tails on the right-hand side of the distribution comparably with the left-hand side.0000* Observation 86 86 86 86 86 86 86 86 Note: Asterisk (*) denotes the null of normality was rejected at 1% significance level.0908 Minimum -0. Table 2: Descriptive Statistics of Study Variables ISE CPI MIR GLD IPI OIL FEX M2 Mean 0.0071 0.1985 3. This model was useful and suitable because the research focus lied in examining the contemporaneous relationships between stock returns and changes in macroeconomic variables.1. money market interest rate (MIR).6717 0.1159 0. skewness is positive for five series. namely consumer price index (CPI).0135 Maximum 0.0012 0. Econometric Model Different methods have been employed to test the relationships between macroeconomic variables and stock prices.2709 2.3887 315.0444 0. More precisely.0256 0. (Vi )t and (Vi )t −1 are the level of variable i for month t and t − 1 respectively.1129 1.0790 0. Dev. OIL.5002 8.2129 -0.3.2238 0. medians.2839 -0.0495 -1.2248 0. 5.4994 0. Number 3 (2010) Before the empirical analysis. standard deviations.1265 -0.1724 0. European Journal of Social Sciences – Volume 14.2772 -0.3292 5. M 2 ) (3) In order to see whether the above identified macroeconomic factors could explain ISE-100 index returns. 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 5.0127 0.0007 -0. international crude oil price (OIL). This study examined the effects of macroeconomic variables on ISE-100 index by using a multiple regression model.0154 Median 0.2752 0.4544 -0. kurtosis as well as the Jarque-Bera statistics and probabilities (p-values).0873 37.0000* 0.0000* 0.0000* 0. On contrary. gold price (GLD). GLD.0116 -0. skewness.4320 4. which indicates the 411 .2093 -0. foreign exchange rate (FEX) and money supply (M2). FEX .9687 Jarque-Bera 12.5452 5.0234 -0.2502 0.9296 6.0509 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. 0.0071 -0. Empirical Results Various descriptive statistics are calculated of the variables under study in order to describe the basic characteristics of these variables.5806 0.0392 0.1172 Probability 0. ISE.0008 0.0474 0.0139 -0.2294 1. G (Vi )t is the continuous growth (change) of variable i month t .1795 0.0101 -0.0048 0.0206 Skewness -0.0791 139. this study hypothesize the model between ISE-100 index (ISE) and seven macroeconomic variables. As it can be seen from the Table 2. IPI .0294 Std.0028 0. containing sample means.1808 0. IPI and OIL have a negative skewness.0073 -0. The hypothesized model is represented as follows: ISE = f (CPI .2357 0.0270 1. minimums.0187 0.0836 0.

029812* (4) -7.178430* (0) -7.8.979582* (0) -5. the results clearly show that none of the independent variables are highly correlated and no multicollinearity amongst independent variables exist.922254* (0) -5.0036774 -0. 1981) and Phillips-Perron (PP) (Phillips and Perron.044237 1 FEX 0. GLD and IPI. Logic behind assumption of no multicollinearity is simple that if two or more independent variables are linearly dependent on each other.269277 0.063283* (0) -7. So the results of above descriptive statistics raise the issue the inefficiency of market.147378* (10) -8. This indicated that individual investor can earn considerably higher normal rate of profit from the Istanbul Stock Market. while for the PP test.823720* (2) -6.291028 0.081770* (10) -12.190213 0. The Augmented Dickey-Fuller (ADF) (Dickey and Fuller. Table 3: Pearson Coefficient of Correlation Matrix CPI MIR GLD IPI OIL FEX M2 CPI 1 MIR 0. one of them should be included instead of both.537952 0. The ADF and PP unit root tests results are presented in Table 4.409842 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. Number 3 (2010) fat tails on the left-hand side of the distribution. The optimal lag lengths for the ADF test were chosen based on the Schwarz Information Criterion (SIC).108168* (12) MIR -5. 1988) unit root tests have been performed in this study in order to check whether the time series are stationary or not. Before proceeding with the OLS estimations. The calculated Jarque-Bera statistics and corresponding p-values are used to test for the normality assumption.60732* (2) OIL -7. The funds of market are not allocated to the productive sector of the economy. in excess of 0.European Journal of Social Sciences – Volume 14.844574* (0) -6. Based on the Jarque-Bera statistics and p-values this assumption is rejected at 1 percent level of significance for all variables.080906 0.003420 -0.483615* (1) 412 .064292 1 GLD 0.8.829561* (2) CPI -7. multicollinearity may pose serious problem. One of the basic assumptions of Ordinary Least Square (OLS) method is that regressors are not mutually correlated. A suggested rule of thumb is that if the pair wise correlation between two regressors is very high. a correlation analysis has been performed.304555 1 M2 0. it is necessary to investigate the time series properties of the variables by utilizing unit root tests.113995 1 OIL -0. In order to check multicollinearity among independent variables. Table 4: Unit Root Test Results (ISE-100 Index and Macroeconomic Variables) ADF Unit Root Test (at level) PP Unit Root Test (at level) Variables Intercept Trend and Intercept Intercept Trend and Intercept ISE -6.889129* (2) -5.187228* (12) -7. multicollinearity is said to exist. it is based on the automatic selection procedure of Newey-West (1994) for Bartlett Kernel.142287 1 IPI 0.310714 -0. If more than one of them is correlated with other.028674 0.074678* (4) IPI -8. Kurtosis value of all variables also shows data is not normally distributed because values of kurtosis are deviated from 3.019714* (0) -7.006772 0.412403 0.836004* (0) -6.526939* (1) -7.079565 -0. The correlation analysis results are reported in Table 3. with the only three exceptions being the monthly variables in CPI. 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.897419* (3) GLD -7. being sensitive to speculation shows periodic change.536928* (0) -7.170425 -0.494260* (0) -7.127243* (0) -7. 1979. Since the highest correlation numbers are lower than 0.153225 -0.132111 -0.22153* (3) -12.

276278* (0) -9. Number 3 (2010) FEX -7.515659 Adjusted R2 0. 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. consumer price index (CPI) does not have any effect on ISE-100 index returns at 10% significant level. As Table 5 reports that the values of adjusted R Square (0. PP is the Phillips-Perron and ADF is the Augmented Dickey-Fuller test. 2. and white noise of residuals. all of the series are accepted not to contain unit root.958527 0. 413 .07.0043* FEX -1.46 and -3. 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.11% variability of the stock price index return can be explained by the consumer price index (CPI). money supply (M2).51 and -2. -3.082400 0. the bandwidth is chosen using Newey–West method and spectral estimation uses Bartlett kernel. foreign exchange rate (FEX).947654 0.657051 0.0546*** OIL -0.952291 0. because the test statistics are more negative than the critical values and therefore t-statistics are lying in the rejection of the null area. For PP tests.471049) suggest that model serves its purpose in determining the effect of macroeconomic variables on stock price index. 5% and 10% critical value for the ADF and PP tests is -3.203693 -5.206744 0. 4. the effect of macroeconomic variables on the ISE-100 index returns is examined by Ordinary Least Square (OLS) estimation.144043* (7) -6.5356 CPI 0.709606 0.2825 IPI -0. gold price (GLD).55919 Prob(F-statistic) 0.351448* (1) -6.264688 1.310092 0. Durbin-Watson (DW) statistic can show us the serial correlation of residuals.312872* (2) -9.000) for the OLS regression.181382 -1. 47. As it can be seen from the Table 4. The proper lag order for ADF test is chosen by considering Schwarz Information Criterion (SIC). Table 5: Regression Analysis Result (Dependent Variable: ISE) Variables Coefficient Std. European Journal of Social Sciences – Volume 14. oil price (OIL).005748 0.16 for trend and intercept respectively. As a rule of thumb. one should look at the diagnostics of regression.043410 2.222316* (1) -7. the hull hypothesis of a unit root can be rejected in both the ADF and PP tests.0914*** GLD -0.518399 0.191005 -1. With computed F-value of 11.471049 Durbin-Watson 2.077621 0.59 for intercept and -4.013741 and this result confirms that there is no serial correlation. industrial production index (IPI).156860* (8) M2 -9. there is evidence of positive serial correlation. representing in parenthesis. 3. Error t-Statistic Probability Constant 0.009238 0.050670 -1. The 1%.098923 0.034275 0.89 and -2. More precisely. if the DW statistic is less than 2.0538*** R2 0.127957 0.228944* (0) -9. representing in parenthesis. Before analyzing the coefficients. OLS estimation results using Newey-West autocorrelation estimator are reported in Table 5.181070 0. money market interest rate (MIR).0000* M2 0.622242 0. In other words. MacKinnon (1996) critical values are used for ADF and PP tests. According to the test results.281899* (3) Notes: 1. Asterisk (*) indicates rejection of the null hypothesis of non-stationary at the 1% level.118972 0.000000 Note: Asterisks (*) and (***) indicates significance at 1% and 10% respectively. In this matter. Having concluded that all of the series are stationary. 5.8568 MIR -0.55919 (p<0. we reject the null that all coefficients are simultaneously zero and accept that the regression is significant overall. The DW statistic in our output is 2.013741 F-Statistic 11. This means that the market evaluates inflation figures nearly correct before the announcement of the actual rate.

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

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