Long-Run and Short-Run Dynamics among the Sectoral Stock Indices: IntroductionThere has been an increasing interest among investors in emerging markets which has led to examine the understanding of the risk and return characteristics of stock prices in these markets. Mainly, investors have gained higher asset returns in emerging markets compared to the developed markets since there is a potential of identifying any signals of informational inefficiency and substantial increase of capital flows from developed markets to emerging markets. Stock indices are frequently used to test the market efficiency and performance of emerging markets particularly in cases where there is a high market concentration. Also, stock indices of different countries are subject to different monetary and fiscal policy shocks from their governments, as well as the specific structural problems each country may face. Therefore, research on individual emerging markets is appropriate to eliminate the effects of different policy and structural shocks on stock indices. read only
Also, the analysis of relationship among different stock market indices in one country becomes important for researchers to examine the financial environment in the country and investors to get benefit from their investments. Among the emerging markets, Turkey is the largest economy in Eastern Europe and Middle East. The US Department of Commerce (DOC) has identified Turkey as one of the ten most promising emerging economies, and a recent World Bank study also declared Turkey one of the ten countries most likely to enter the top tier of the world economy. These characteristics make the Turkish stock market a good representative of many emerging stock markets.
The Istanbul Stock Exchange (ISE hereafter) is a dynamic and growing emerging stock market with an increasing number of publicly traded companies and strong foreign participations. Since 1989, there have been no restrictions on foreign portfolio investors trading in the Turkish securities markets. Hence, the Turkish stock market provides a transparent and fair trading environment for both domestic and foreign investors without any restrictions on the repatriation of capital and profits. The market capitalization in the ISE has increased from $7 billion in 1989 to $18.74 billion in 1990 and reached $307.55 billion in 2010. Another noticeable growth is observed in the trading value, which has sharply increased from only $ 13 million in 1986, to over $ 428 billion in 2010. With the respect of Turkish economy’s strong growth, low indebtedness and robust budget performance, the ISE has become the second-best-yielding stock exchange with % 25.6 return, according to a report by a Turkish stock market association, KoteDer.
Until the end of 1996, ISE used to compute only the ISE-100 index. As of 1997, sector and sub-sector indices began to be calculated within ISE aiming to measure performance of a stock market for different sectors. In this respect, for portfolio diversification and risk avoidance purposes, it is essential to examine the short-run and long-run comovements of different indices of a stock market.