FRACTIONAL COINTEGRATION ANALYSIS OF STOCK MARKET AND EXCHANGE RATES: THE CASE OF TURKEY

Abstract

The fluctuations and responses between the exchange rate and the stock market has been a topic of interest for both policy makers and market participants for a long time. The aim of the study is to examine so-called relationship using fractional cointegration analysis. For this purpose, we utilized from Borsa İstanbul and daily exchange rates USD/TRY and EUR/TRY for period 2002:01–2015:04 to determine this relationship. Fractional cointegration analysis indicates presence of an equilibrium in the long term in series and fractional integrated errors show persistent characteristics which indicate long memory. Therefore instead of using classical cointegration we have decided using Geweke and Porter-Hudak fractional cointegration for more accurate results. Results indicate that there is a significant positive cointegration between exchange rates and stock prices in Turkish market Borsa İstanbul. This study contributes to literature by analyzing the phenomenon under long memory conditions in Borsa Istanbul.

Keywords

• financial markets
• fractional integration
• fractional cointegration