Return and volatility spillovers among trading partners: Evindence from Turkish market

In this thesis, the dynamic structures of returns, volatility spillovers, and conditional correlations between Turkish stock and bond indices and the relevant indices of countries with which Turkey has both high and low trade relationships in terms of exports, imports, foreign direct investment inflows, and foreign direct investment outflows during the period from January 1, 2015, to December 31, 2022, are examined. The specific indices used for the study, from each selected country include the primary stock indices representing the overall market, four sectoral indices representing manufacturing, finance, technology, and telecommunications, and a 10-year bond index. The countries in the High-Trade group are Germany, UK, Italy, Netherlands, USA, and China, while the Low-Trade group includes Australia, Sweden, and Canada. Another significant aspect of this work is the examination of how the global Covid-19 pandemic has affected the variability of returns, volatility spillovers, and conditional correlations for these indices among Turkey and its trading partners. The exact date of the Covid-19 pandemic is determined by relevant structural break tests. Finally, the effects of the returns of four different exogenous variables, namely the Volatility Index (VIX), Brent Crude Oil (BRENT), Currency Exchange (USD/TRY), and Credit Default Swap (CDS), on conditional correlations are separately examined. Structural break tests (ICSS) were applied to determine the exact date of the Covid-19 pandemic. Vector Autoregressive-Asymmetric Dynamic Conditional Correlation (VAR- ADCC-GARCH) method was used to examine returns and volatility spillovers. The Generalized Autoregressive Conditional Heteroskedasticity with External Variables (GARCHX) method was applied to analyze the effect of external variables on conditional correlations. The contributions of the study are five-fold: First, the existence of connections between Turkey's financial indices and those of countries with high or low trade volumes. Second, determining the actual break dates in each Turkish financial market instead of relying on the Covid dates announced by the Turkish Ministry of Health, and subsequently identifying the effects of Covid. Third, considering sectoral indices for portfolio diversification purposes for market makers and decision-makers. Fourth, integrating 10- year bond indices, which serve as a significant indicator of countries' macroeconomic data, into the system alongside stock indices. Lastly, measuring the impact of exogenous variables on conditional correlations between countries. The results of this study may help identifying contagion effects of spikes in returns and volatility in financial markets, and, therefore, providing investors with insights to diversify their portfolios and hedge risks effectively.