The effect of inflation and inflation uncertainty on stock returns: The Borsa Istanbul example

This study examines the effects of inflation and inflation uncertainty on stock returns traded on Borsa Istanbul in Turkey during the period 2006:1 – 2024:4 and the relationship between these variables. The main purpose of this study is to examine the possible effects of high inflation in Turkey for many years and the inflation uncertainty caused by this high inflation on stock returns and to evaluate the extent of this relationship, if any. The examined time period covers a period when significant structural changes were experienced and financial markets deepened with the transition to open inflation targeting in the Turkish economy. In the analyses, BIST100 index returns reflecting the performance of the first 100 companies with the highest trading volume and market value are used as representatives of stock returns in Turkey. CPI rates are preferred as representatives of inflation. The data were obtained from the TCMB EVDS and there are 220 observations at a monthly frequency. In these studies, inflation uncertainty was modeled using autoregressive conditional variance (ARCH) and generalized autoregressive conditional variance (GARCH) methods. In addition, Johansen cointegration test was applied to determine the long-term relationships between variables and FMOLS, DOLS and CCR methods were applied for the analysis of long-term coefficients. As a result of these analyses, it was determined that inflation and inflation uncertainty positively affected stock returns in Turkey. In particular, it was determined that the increase in inflation uncertainty (volatility) increased stock returns more than the increase in inflation. Therefore, it has been shown that stocks are a safe haven in an inflationary environment.