TAILIEUCHUNG - The Relationship between Stock Prices and Exchange Rates Evidence from Turkey

Muirhead (1987) reviews the large literature on shrinkage estimators of the covariance matrix in finite-sample statistical decision theory. All these estimators suffer from at least two severe drawbacks, either of which is enough to make them ill-suited to stock returns: (i) they break down when N T; (ii) they do not exploit the a priori knowledge that stock returns tend to be positively correlated to one another. Frost and Savarino (1986) show that the solution to the second problem is to use a shrinkage target that incorporates a market factor, but they ignore without justification the correlation between estimation error on the shrinkage target and on. | International Research Journal of Finance and Economics ISSN 1450-2887 Issue 23 2009 EuroJournals Publishing Inc. 2009 http The Relationship between Stock Prices and Exchange Rates Evidence from Turkey Oguzhan Aydemir Afyon Kocatepe University ANS Kampusu Afyonkarahisar E-mail aydemir@ Tel 90-272-2281292 223 Erdal Demirhan Afyon Kocatepe University ANS Kampusu Afyonkarahisar E-mail demirhan@ Tel 90-272-2281292 Abstract Over the past few decades determining the effects of macroeconomic variables on stock prices and investment decisions has preoccupied the minds of economists. In the literature there are many empirical studies to disclose the relationship between macroeconomic variables such as interest rate inflation exchange rates money supply etc. and stock prices. However the direction of causality still remains unresolved in both theory and empirics. In this paper we investigate the causal relationship between stock prices and exchange rates using data from 23 February 2001 to 11 January 2008 about Turkey. The reason of selecting this period is that exchange rate regime is determined as floating in this period. In this study national 100 services financials industrials and technology indices are taken as stock price indices. The results of empirical study indicate that there is bidirectional causal relationship between exchange rate and all stock market indices. While the negative causality exists from national 100 services financials and industrials indices to exchange rate there is a positive causal relationship from technology indices to exchange rate. On the other hand negative causal relationship from exchange rate to all stock market indices is determined. Keywords Stock Prices Exchange Rate Toda-Yamamoto Turkey JeL Classification Codes F31 G10 G12. 1. Introduction Many factors such as enterprise performance dividends stock prices of other countries gross domestic product exchange rates interest rates .

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