Investigating the impact of common macroeconomic factors on stock returns of Borsa Istanbul companies

This paper studies explanatory power of macro variables on the variation of stock returns for Turkish economy with the help of principal component analysis and Fama Macbeth two pass regression model. 29 Macroeconomic variables for the time period that spans from 2006:1 to 2015:08 are used to analyze cross section of returns. Principal component analysis is employed to extract 7 latent factors to summarize the information of 29 monthly series. A two step test procedure of Fama-Macbeth is implemented to measure the empirical performance of factor model which is constituted by those latent factors. 4 out of 7 factors have been found to significantly impact common variation in Turkish stock returns. When loadings of factors which are extracted from macroeconomic series through principal component analysis are considered, foreign currency, deposit, producer price index, government debt securities, and consumer price index based factors seem to be priced risk factors.