Impact of macroeconomic indicators on stock market performance: The case of the Istanbul Stock Exchange

Sibel Karina Arnes

Student thesis: Master thesis


The purpose of this study is to investigate whether it is possible to predict stock market returns on the Istanbul Stock Exchangewith the use of macroeconomic variables. Turkey’s economy has gone through rounds of high inflation and negative real interest rates in the 1980s and 1990s, but in the last decade has been relatively stable. As a result of this stability and the growth that has followed, Turkey is today a G20 economy. Turkey’s growing economic power and the active foreign policy of the Justice and Development Party in the region has led Turkey and the Istanbul Stock Exchange to now work towards positioning itself to become the nexus of Islamic finance. In light of this, it is useful to investigate any possible relationships among national macroeconomic factors and the stock market in Turkey. Looking at the period from 1994 to 2013, we use stock indices as proxies of stock prices. We focus at a macro level on the XU100 National index, and at a micro level on various sector indices to tease out any industry specific differences. The sectors investigated include the financial, services, industrials, and technology indices. In the international literature there is a wide variety of methods used for modeling the relationship between financial variables. We use the Engle and Granger (1987) multivariate cointegration approach to test for a long-run relationship between these indices and various macroeconomic factors, before turning to estimate our factor models. Due to the data driven and historically grounded nature of the paper, our results are important for policy makers, financial managers, financial analysts and investors dealing with the Turkish market. Key words: Turkey; Istanbul Stock Exchange; Macroeconomic factors; Portfolio theory; Engle Granger cointegration; Factor models

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
Publication date2014
Number of pages91