Relationship between stock price and exchange rate: A study in Borsa Istanbul indices

In the world, both individual and institutional investors prefer different investment instruments. According to this preference, investment instruments affect each other in accordance with the supply-demand balance. Stock price and exchange rates, which are important investment instruments, are also indirectly related to each other. There are various accepted theories regarding the relationship between stock price and exchange rates. Two theories stand out among these theories, "Traditional Theory" and "Portfolio Balance Theory", which are opposite of each other. According to Traditional Theory, the stock is positively affected by the exchange rate, while in the Portfolio Balance Theory, the exchange rate is negatively affected by the stock price. In studies, which of the two theories is valid in the world stock markets differs according to the countries. In this study, it is reveal which approach is valid in Borsa Istanbul and whether the approaches differ according to sector indices. In this context, the monthly data of BIST-100, BIST Financial, BIST Industrial, BIST Services and BIST Technology index for the period 2010:01-2020:12 were analyzed against the nominal USD/TL rate. Johansen cointegration, CCR, DOLS, FMOLS and Granger causality analysis were used as methods. It has been determined that the five indices that are the subject of the study have a cointegration relationship with the dollar/TL exchange rate and that there is a one-way positive relationship from the dollar rate to the BIST indices. Accordingly, it has been concluded that Traditional Theory is valid in Borsa Istanbul and in Borsa Istanbul's main sector indices.