The relationship between the stock returns and the macro economic variables: Time series analysis for Turkey

This study examines causality relations between macro-economic variables and stock returns. In this sense, Granger causality and impulse-response functions analyses have been conducted through the instrumentality of VAR and VECM based on the data between the first period of 1998 and last period of 2009. Long-run relations have been explored with cointegration method. The relations, to the empirical evidence, prevail in the long-run from output to stock index; however, do prevail in both short and long-run from stock index to output. Short-run causality is found from money supply to stock index. Only long-run relations are found from stock index to money-supply. Considering the relations between stock index and exchange rate, it is revealed that from exchange rate to stock index there exist causality relations in the long-run; however, from stock index to exchange rate it does both in short and long-run. Also results indicate that there is a one-way short-run relation between stock index and interest rate in which causality is in direction from stock index to interest rate. No relation is found between stock index and inflation. Cointegration equation results show that output and money supply effects stock index positively in the long run, however, exchange rate effects it negatively.The impulse-response functions (IRF) analyses reveal that the variables production amount and money supply response positively to the stock index, on the other hand, exchange rate response negatively to the stock index. The responses of stock index to the money supply and production amount are positive, but it is negative to the exchange rate. Finally, mutual responses among stock index, interest rate and inflation rate differs on the basis of time periods.