A bounds test analysis of exchange rates and stock prices in Turkey

Abstract

This paper examines the relationship between exchange rates and stock prices in Turkey for the period 01.1990 - 07.2008 by using monthly time series data. The study uses Bounds test procedure developed by Pesaran, Shin and Smith (2001) for cointegration and causality test suggested by Toda and Yamamoto (1995) for causal relationship between exchange rates and stock prices. The analysis has also been carried out for the two sub-periods 01.1990 - 12.1994 and 01.1995 - 07.2008. The empirical results show that there is evidence of cointegration between exchange rates and stock prices in the long run. According to the test results of Toda-Yamamoto causality analysis, there exists a bi-directional causality relationship between exchange rates and stock prices for the 01.1990 - 07.2008 and 01.1995 - 07.2008 periods. These findings support that the "traditional " and "portfolio balance " approaches can be valid for Turkey.