The impact of interest rate and exchange rate changes on herding behavior: A Research on Borsa İstanbul

Interest and exchange rates are critical macroeconomic variables that impact the stock exchange. This study investigated the effect of interest rate and exchange rate changes on the herding behavior in the Borsa Istanbul Equity Market. Additionally, the study examines the impact of Monetary Policy Committee (MPC) announcements and excessive exchange rate volatility on herding behavior. For this purpose, data from 545 stocks traded on Borsa Istanbul, the Dollar exchange rate, and the Central Bank of the Republic of Turkey (CBRT) weighted average funding cost were used between 2011-2021. The sample group was also divided into sub-samples based on small and large market capitalization for further analysis. The presence of herding behavior was tested using the Cross-Sectional Absolute Deviation (CSAD) method. According to empirical results, herding behavior was observed in both the total sample and the sub-sample with small market capitalization during all periods and up market conditions, while no herding behavior was found in the sub-sample with large market capitalization. On the other hand, herding behavior did not occur in down market conditions. Furthermore, herding behavior was observed in both the total sample and the small market capitalization during interest rate changes and when the Turkish Lira gained value. Investors exhibited herding behavior when interest rates decreased, and the Turkish Lira gained or lost value during up market conditions; however, no herding behavior was observed when interest rates increased and the Turkish Lira gained value during down market conditions. Finally, anti-herding behavior occurred when the MPC changed the policy rate, while herding behavior was observed during the excessive appreciation of the Turkish Lira.