The impact of political and economic decisions taken by govt on stock markets: Turkey from 1985-Present

Abstract

An empirical study will be conducted to evaluate how the Turkish stock market, Borsa Istanbul, is affected by political and economic decisions made by the Turkish government. The dependent variable of this study is the Turkish Stock Market Index, where the Borsa Istanbul 100 Index (XU100) will be used as a measure of the Turkish Stock Market Index. Two main independent variables which will be used in this study are political decisions and economic decisions; where one variable, namely; Geopolitical Risk Index (GRI) for Turkey, will be used as a measure of political decisions. However, three variables, namely; the Real Effective Exchange Rate (RER) for Turkey, consumer price index (CPI) for Turkey, and interest rate (R) for Turkey, will be used as measures of economic decisions by the Turkish government. Historic data for the variables of the political and economic decisions from the year 1985 to the year 2020 will be statically analyzed using a model equation and time-series regression analysis to conclude how stock markets are impacted by their respective impacts.

1.0 Introduction

The aim of this study is to answer the research question, which is focused on empirically evaluating how the Turkish stock market, Borsa Istanbul, is affected by political and economic decisions made by the government in Turkey using data from the year 1985 to the year 2020. Historic data for the variables of the political and economic decisions will be statically analyzed using a model equation to conclude how stock markets are impacted by their respective impacts.

2.0 Motivation for the Research Question

Stock market performance can be influenced by various factors, including changes in the macro-environment of a country, such as political and economic policies and decisions made by the country’s government. Stock market reactions to the political and economic decisions have been of interest to researchers, investors, companies, and policymakers (Gok & Dayi, 2018). It is important for investors to identify how the change in government political and economic policies can have varying impacts on the stock market indexes and how it can drastically change the sentiments and trading in the stock market (Günay, 2016). Various studies have been conducted around the world, including Turkey, to evaluate how stock markets can be impacted by the political and economic decisions of Aktas and Oncu (2006), Mehdian, Nas, and Perry (2005), Çam (2014), Günay (2016), Gok and Dayi (2018), Tiryaki and Tiryaki (2018). However, limited evidence is found where both the political and economic decisions are studied in single research, especially in Turkey, to identify their impacts on the stock market index. Only one study was found in the literature, which was conducted by Tiryaki and Tiryaki (2018), where the impacts of political and economic decisions on the stock market index were studied in single research in Turkey. In view of this, the proposed study is of great importance because it aims to evaluate how the stock market index is affected by political and economic decisions in Turkey.

Turkey is a country with political tension and poor economic decision-making. The political decisions, government foreign policies, events like terrorist attacks, and political tension in Middle-east may have a negative impact on its stock market index (Gok & Dayi, 2018). Moreover, the Turkish economy has experienced unusual events in the past years; for instance, in August 2018 the exchange rate crisis occurred, which was mainly caused by the humiliating speech of the then Minister of Finance Berat Albayrak, the coup attempt in 2016, the controversial referendum of the one-man regime in 2017, the finding of natural gas in the Black Sea in 2020, the Gezi Park protests and many more events that had major impacts on stock returns (Tiryaki & Tiryaki, 2018; Oguz, 2020). In view of this, it is of value to empirically test how political events and economic decisions have affected the stock market index in Turkey.

3.0 Literature Review

A review of the past empirical studies conducted in Turkey is provided in this section, where those studies have been reviewed in which the impact of variables of political decision or policy and the economic policy on stock market variables were studied. This section will help in identifying the suitable variables and the analysis methods which can be used in this proposed study to measure the impact of political events and economic decisions on the stock market index in Turkey. The studies which have been included in the review were conducted in the last 15 years. Therefore, any study which was conducted earlier than 2005 will be excluded, and it will be the exclusion criteria for the past studies.

A study on the macroeconomic variables impacting the stock market prices of Turkey BIST100 index (BIST) was conducted in 2018 by Tiryaki and Tiryaki. It found that the index is negatively impacted by changes in the interest rate (R) in Turkey. Other macroeconomic factors positively impact the index returns in the short run, such as the real effective exchange rate (RER), Consumer Price Index (CPI) and the Industrial Production Index (IPI). These results were found using ARDL estimation methods. The study showed that in the long-run, stock returns of BIST are determined by changes in CPI, EPU, RER and IPI.

The impact of political decisions on the Turkish stock exchange was studied by Aktas and Oncu (2006). From the research, it was found that stock prices are inversely related to any negative political event in Turkey. The study was based on the theory of Efficient Market Hypothesis (EMH), which assumes that equity market prices are based on all available information, with new data immediately incorporated into the stock prices. Price declines during fluid political environments provide the perfect opportunity to test the validity of EMH. The authors used day-wise data and OLS analysis to study pre and post-impact of a turbulent political event in Turkey. This event on March 1, 2003, when the Turkish parliament unexpectedly rejected a bill for the deployment of US military personnel in the country, led to steep declines in the Turkish stock exchange IMKB. Hence the authors using data from this event, concluded that surprising political decisions put stress on the financial market, with the participants losing rationality to critically assess the actual impact of the event.

Another study in Turkey by Mehdian, Nas, and Perry (2005) evaluated the forecast of two different theories on stock market reactions to political or economic events in the country. It found that the Turkish market, in the face of ambiguity, adjusted prices below fundamental stock valuations. Another study by Cam (2014) found a major relationship between Turkish company valuations and political uncertainty in the country. Kaya et al. (2015) also found that returns on the BIST100 index are inversely related to political risk in the long term horizon.

Further studies by Gunay (2016) on the effects of internal political uncertainty on the Turkish stock market found similar relationships. Using data from 2001-2014, the study made an empirical analysis to identify breaks and regimes in the returns of the BIST100 index. Results from the analysis found that although breaks in the market are higher in frequency, however, the risk level is continuously moving towards a downward trend. Hence the trend is towards a lower risk level today than in previous regimes. This leads to the conclusion that although the Turkish market continues to react to political changes, however, the impact of those reactions is lower than in the past.

Gok and Dayi (2018) based their study on the impact on market returns during Turkish general elections. Since elections are a source of political uncertainty, the study is highly relevant to our analysis. Gok and Dayi (2018) used the event study analysis of three general elections in Turkey taking place from 2010 to 2017. Results from the study found that the June 2015 elections had a major negative impact on the Turkish stock market due to the breakdown in talks to develop a coalition government after the election. However, the market reacted positively once new elections were held in November 2015. This leads to the conclusion that even though the impact of elections on the stock market is obvious, however, their scale of the effect is short-lived. This short-term volatility was also revealed in the GARCH (1.1) model results.

4.0 Description of Variables

In this section, the independent (predicting) variables and dependent variables and their measures and symbols are discussed. As the aim of this study is to evaluate the effect of political and economic decisions by the Turkish government on the Turkish stock market therefore, the main variables of this study include; political decisions, economic decisions, and the performance of the Turkish Stock Market Index.

4.1 Dependent Variable

The dependent variable of this study is the Turkish Stock Market Index, where the Borsa Istanbul 100 Index (XU100) will be used as a measure of the Turkish Stock Market Index.

4.2 Independent Variable

Two main independent variables which will be used in this study are political decisions and economic decisions; where one variable, namely; Geopolitical Risk Index (GRI) for Turkey, will be used as a measure of political decisions. However, three variables, namely; the Real Effective Exchange Rate (RER) for Turkey, consumer price index (CPI) for Turkey, and interest rate (R) for Turkey, will be used as measures of economic decisions by the Turkish government. These same variables were also used by Tiryaki and Tiryaki (2018) while analyzing the impact of political and economic variables on stock returns of the Turkish stock market. 

Table 1. Variables Used

5.0 Data and Methodology 

5.1 Data

Time series data will be collected for the selected variables of the Turkish stock market, political decisions and economic decisions. The historic (time series) data for the daily XU100 index will be collected for a period of 36 years (from the year 1985 to the year 2020) will be collected from Trading Economics and the Bloomberg website database. Moreover, the daily data for the variables of political decisions, GRI, will be collected from the data based found on Economic Policy Uncertainty website. However, the daily data for the selected measures of economic decisions, namely; RER, CPI, and R, will be collected from Bloomberg website database. The data for the selected variables will be collected for 36 years (from the year 1985 to the year 2020).

5.2 Methodology

The political and econometric data will be collected and analyzed in this study therefore, and a regression model is to be developed to analyze how the Turkish stock market index is affected by political and economic decisions made by the government in Turkey. The daily data for the selected variables of Turkey are to be analyzed for 36 years from the year 1985 to 2020. Therefore, the data was time series and an appropriate regression model for time series analysis was required to be developed (Field, 2013). Using the variables of political and economic decisions of the government in Turkey discussed in the previous section, the following regression-based equation model is developed, which will be statistically tested in the final dissertation.

XU100 = 𝛽C + 𝛽(GRI) + 𝛽(RER) + 𝛽(CPI) + 𝛽(CPI) + 𝛽(R) + 𝜀

Where;

C = Constant

𝛽 = Coefficient of predicting variables

𝜀 = Error term in the model

A quantitative research method was employed to statistically test the regression model (Bryman & Bell, 2015). Moreover, as this study involve the impact of variables (political and economic decisions) on another variable (the Turkish stock market), therefore, causal research design and positivist research philosophy will be employed to conduct this study (Saunders, Lewis, & Thornhill, 2012). The regression model will be statistically tested using the time-series regression analysis because the data which will be used in this study is time series (Field, 2013). The time series regression analysis will be used to test the following null hypotheses;

H0₁: Geopolitical Risk Index (GRI) has a significant negative impact on Turkish Stock Market Index (XU100)

H0₂: Effective Exchange Rate (RER) has a significant negative impact on Turkish Stock Market Index (XU100)

H0₃: Consumer price index (CPI) has a significant negative impact on Turkish Stock Market Index (XU100)

H0₄: Interest rate (R) has a significant negative impact on Turkish Stock Market Index (XU100)

6.0 Conclusion

The reviewed literature was evident that stock markets can be negatively impacted by the political and economic decisions in Turkey (Aktas & Oncu, 2006; Mehdian, Nas, & Perry, 2005; Çam, 2014; Günay, 2016; Gok & Dayi, 2018; Tiryaki & Tiryaki, 2018). However, limited studies have been conducted in the past where the impacts of political and economic decisions on the Turkish stock market index have been studied. Therefore in this study, using the regression model, the impact of the variables of Turkish political and economic decisions on the Turkish stock market index will be studied. Upon completion of this study, the findings of the past studies will be compared and contrasted to extend the knowledge of the literature. 

7.0 Bibliography

Aktas, H. & Oncu, S. (2006). The Stock Market Reaction to Extreme Events: The Evidence from Turkey, International Research Journal of Finance and Economics, 6(1), 78-85. Online; https://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.319.6510&rep=rep1&type=pdf

Bloomberg (2020). Borsa Istanbul 100 Index (XU100). https://www.bloomberg.com/quote/XU100:IND

Bryman, A., & Bell, E. (2015). Business research methods. Oxford University Press, USA.

Çam, A. V. (2014). The relationship between political risk and firm value: an application on companies in ISE Doğuş Üniversitesi Dergisi, 15(1), pp. 109-122.

Economic Policy Uncertainty (2012). Geopolitical Risk Index. Online https://www.policyuncertainty.com/gpr.html#:~:text=The%20Geopolitical%20Threats%20(GPT)%20index,newspapers%20and%20starts%20in%201985.

Field, A. (2013). Discovering Statistics Using IBM SPSS Statistics. New York, SAGE.

Gok, I. Y., & Dayi, F. (2018). The Effects of Political Uncertainty on the Turkish Stock Market: An Event Study Analysis. 2nd International Scientific Conference – Eman 2018 – Economics and Management: How to Cope With Disrupted Times, Ljubljana – Slovenia, March 22, ​​DOI: https://doi.org/10.31410/EMAN.2018.191

Günay, S. (2016). Is Political Risk still an Issue for Turkish Stock Market? Borsa Istanbul Review, 16(1), pp. 22-31. http://dx.doi.org/10.1016/j.bir.2016.01.0032214-8450/

Kaya, B. A., & Güngör, M. S. (2015). Özçomak Politik Risk Yatırımcının Dikkate Alması Gereken Bir Risk Midir? Borsa Istanbul Ornegi Gazi Universitesi Iktisadi ve Idari Bilimler Fakultesi Dergisi, 16(1), pp. 74-87.

Mehdian, S., Nas, T., & Perry, M. J. (2005). An Examination of Investor Reaction to Unexpected Political and Economic Events in Turkey, First International Conference on Bussiness, Management and Economics, 16-19 June 2005, Cesme-İzmir, Turkey.

Oguz, Z. (13 October, 2020). The Unintended Consequences of Turkey’s Quest for Oil Forthcoming in MER issue 296 “Nature and Politics”. MERIP. Online; https://merip.org/2020/10/the-unintended-consequences-of-turkeys-quest-for-oil/

Saunders, M. N., Lewis, P. & Thornhill, A. (2012). Research Methods for Business Students. London: Pearson.

Tiryaki, A., & Tiryaki, H. N. (2018). Determinants of Turkish Stock Returns under the Impact of Economic Policy Uncertainty. International Journal of Economic and Administrative Studies, 147-162. https://dergipark.org.tr/en/download/article-file/591244 Trading Economics (2020). Turkey Stock Market (XU100). Online; https://tradingeconomics.com/turkey/stock-market#:~:text=The%20Istanbul%20Stock%20Exchange%20National,is%20a%20capitalization-weighted%20index.