The effect of political risk index to Borsa İstanbul stock returns: A sectoral application

The capital accumulation has a criticial importance in terms of economic growth in developing countries like Turkey. One of the ways of supplying capital accumulation is to provide an environment that can attract the financial investors' investments to the country. In this context, it's an important field to analyze the factors affecting the stock returns for financial investors. One of these factors is the risk factor. Within this framework, this study tests the relationship between the political risk, which is in the group of systematic risk, and stock return. The political risk scores used in this study are provided with ICRG (International Country Risk Guide) and the data used for the stock returns includes the monthly average values of BIST (Borsa Istanbul) daily closing figures. The study analyzes the relationship between the political risk score of the country and the stock returns of the companies in five different segments, (Energy, Banking and Private Finance Institutions, Real Estate Investment Trusts, Retail and Chemical, Petroleum Rubber and Plastic) traded in Istanbul Stock Market with the monthly datas in periods 2006:1-2016:12. Panel unit root, panel cointegration and panel causality analysis methods are applied in the research. The forecast results show that the political risks have negative effects on stock returns in all fields. The causality test results reveal a one-way causality relationship from political risk to stock returns. The findings are discussed and various political suggestions are offered in the conclusion part of the study.