Monetary uncertaintyand stock return: The case of Turkey

The concept of uncertainty, as one of the determiners of investments in recent years, occupies an important placein the literature of economics. The overall economic outlook of a country is assessed with its macroeconomicperformance. A fluctuation taking place in exchange rates and money supply at the same time will affect theinvestors in the stock markets. Also, in the long term, uncertainties will affect stock exchange yields adversely.Although there are different types of uncertainties, in this study money supply uncertainty and exchange rateuncertainty were chosen as the indicators of monetary uncertainty.By analyzing time series data, the relation between the real exchange rate uncertainty and money supply uncertaintywas empirically investigated. The time series data sets (exchange rates and money supply (M2)) used in this studywere taken from the statistics of Central Bank of Turkey (TCMB). In addition, stock exchange yields of fivecompanies or holdings traded on Istanbul Stock Exchange (İMKB) were used. The data set used in this study comprisesthe period from 1986:5 to 2012:2. First, time series were cleaned out from trend effect with the help of unite roottest and then exchange rate and money supply uncertainties were investigated with ARCH/GARCH models.To see whether there is a relation between the independent variables, exchange rate uncertainty and money supplyuncertainty, and the dependent variable, stock exchange yield,Engle-Granger co-integration test and regressionanalysis were applied. The findings revealed that there is a co-integration between stock exchange yield andvariables of exchange rate uncertainty and money supply uncertainty. The results obtained also indicated thatexchange rate and money supply uncertainties have a significant effect on the stock exchange yields of the companiesor holdings traded on Istanbul Stock Exchange (İMKB).Keywords: Exchange Rate Uncertainty, Money Supply Uncertainty, Stock Return, Arch Model, Garch Model, Co-integration