Determining dynamic connectedness among indicator stock exchanges of developing countries using TVP-VAR Method: Evidence from E7 countries

Financial markets have ceased to be areas shaped solely by economic data and rational expectations, and have increasingly become guided by elements such as investor behavior, psychological factors, and social trends. Although traditional finance theories are based on the assumption that investors act rationally and make all their decisions in line with the principle of maximum benefit, the crises and sudden fluctuations in the market in recent years have shown that these approaches are inadequate. For this reason, a new theory called behavioral finance has been developed and the effect of investors' psychological tendencies on the markets has begun to be systematically addressed. In this context, investor sentiment refers to the reflections of investors' decisions made with emotional reactions such as optimism or pessimism, independent of economic realities, on financial markets. The relevant study is also important in terms of transforming savings into investment opportunities within the scope of portfolio diversification theory. The main purpose of this study is to reveal the dynamic connectivity relationships between the indicator stock markets of the E7 countries and to determine the effect of these connectivity levels between the periods analyzed. Preferred periods include war, economic crisis, contraction, and pandemic, etc. periods and related movements will help investors with decision-making problems. In this context, while the receiver and emitter statuses are important for the determination of the level of relationships, the factors that play a role in investment decisions, the shock receiver and emitter in terms of countries are revealed in terms of sectoral and economic awareness. In this direction, for the selected E7 countries and stock exchanges, Turkey (Borsa Istanbul 100 Index-BIST100), China (Shanghai Composite Index-SSEC), Indonesia (IDX Composite Index-IDX), Brazil (Bolsa de Valores de São Paulo Index-BOVESPA), India (Stock Market Index-Nifty50), Mexico (S&P / BMV IPC-MXX), Russia (MOEX Russia Index-RTSI) indicator indices were selected. The dynamic connectivity relationships between the indicator stock exchanges of E7 countries were analyzed with the TVP-VAR method developed by Antonakakis et al. (2019-2020). According to the analysis results, it is concluded that Brazil, Mexico and Russia indices (shock emitters) are countries that spread net dynamic connectivity. It has been determined that Turkey, China, Indonesia and India are affected by the other three countries (shock receivers). When expressed with indicator indices, MXX, IBOV and IMOEX are the three indices that carry out shock propagation. It has been concluded that the indices that are shock receivers are JKSE, NSEI, SSEC and XU100. The study has comprehensively addressed Behavioral Finance, which has an important place in finance science, theoretically and within this scope, it has also explained the factors that affect individuals. In addition to the analyses made in this respect, it has also been stated that some individual anomalies and heuristics will be effective in investment decisions. In this respect, a holistic perspective has also been exhibited. The findings obtained show the relations between countries and reveal the importance of portfolio diversification. The fact that shock emitter and receiver countries have been determined allows investors to know the alternatives they can use in the decision-making phase and to invest in the relevant assets. In addition, information for policy makers as well as investors is also presented within the scope of the study.