Dynamic relationship between stock prices and exchange rates: the case of Türkiye

The dynamic relationship between stock prices and exchange rates holds significant importance in global financial markets and is critical for economic stability, investment decisions, and the management of monetary policies. Portfolio theory is an important theoretical approach where investors attempt to achieve optimal risk management by creating portfolios diversified across different asset classes to balance risk and return. Additionally, macroeconomic factors, economic indicators, and central bank policies influence both stock prices and exchange rates, shaping the dynamic connection between these two markets. In this context, this thesis examines in detail the dynamic relationship between the BIST100 index and exchange rates in Turkey. One of the main findings of the study is that with the increase in globalization and financial integration, portfolio risk is influenced not only by local stock market volatility but also by exchange rate risk. The results obtained evaluate this relationship using various analysis methods with daily data from January 1, 2002, to April 4, 2023. Causality and Cointegration Analysis has been used to examine the dynamic relationship between stock prices and exchange rates. The study found a unidirectional relationship between the BIST100 index and exchange rates, with Granger causality analysis indicating a one-way causality from the BIST100 to exchange rates. The Engle-Granger cointegration test results suggest the presence of a long-term relationship, indicating that changes in portfolios could exhibit long-term interactions. The analysis using the Multivariate GARCH (BEKK) model shows a spillover effect from exchange rates to the BIST100. This finding suggests that events in the foreign exchange market can affect stock prices and that this effect can propagate over time. The study also identified both weak correlations among returns and strong correlations in daily normal data using unconditional correlation analysis along with time-varying conditional correlations. This indicates that sudden fluctuations in the markets could impact the strong correlation in the relationship between stock prices and exchange rates. Finally, the study provides an important perspective on how market interactions evolve over time and how risks in financial markets may change over time.