The main purpose of this paper is to empirically examine the short-run and long-run dynamics among the sector indices of the ISE. By focusing on the relationship between different indices belonging to ISE, we will attempt to analyze the performance of different sectors of an economy with respect to price and return performance as well as the financial depthnesses of these sectors. The investigation of the contemporaneous behaviors of sector indices is crucial since they include important information about the efficiency of stock market. The contribution of this paper to the related literature is three-fold. First, to the authors’ best knowledge, this is the first study that examines the short-term and long-term linkages among the six different sub-sector indices of the ISE. Since Turkey is an attractive emerging market for investors, we believe that such an analysis will be valuable for investors. Second, it utilizes a single country data set to eliminate the effects of different monetary and fiscal policy and structural shocks on stock market indices.
The rest of the paper is organized as follows. First of all, a brief literature review about the dynamic interactions among sector indices is given which is followed by data set. Then, the econometric methodology is provided. Empirical results are presented in the following section. Finally, concluding remarks are offered. read more
Many studies in the literature have been devoted to investigation of short-term and longterm interrelationships among worldwide stock markets. These studies mainly concentrated on the relationship of international stock market indices (see, e.g., Kasa 1992; Beckers et al., 1996; Griffin and Karolyi 1998; Beca et al. 2000; Ferreira and Ferreira 2006; Hargis and Mei, 2006; Meric et al. 2008). A major contribution of these studies was the information they provided for financial market participants about the diversification potential among international stock markets.
Although there exists a vast literature regarding how different stock markets interact over time, limited number of studies is undertaken to examine the dynamic interactions among sector indices within the same stock market. An important study in this line of research is that of Arbelaez et al. in which they analyzed the short-term and long-term linkages among the several stock indices of the Colombian stock market applying tests of cointegration, causality, impulse response and variance decomposition. The results indicated that the Colombian market indices are highly correlated with each other and exhibit long-term linkages that could explain the rejection of weak form market efficiency. Amongst others, Ratner investigated the efficiency and characteristics of the nine major indices of the Madrid Stock Exchange and the findings did not support weak form efficiency. Ewing analyzed the interrelationships among five major S&P stock indices in order to determine their interrelationships and how shocks to one index are transmitted to the others. By and large, he found strong interrelationships amongst the five S&P’s stock indices. In other study, Wang et al. examined the patterns of information flows within and across sectors of the two Chinese stock exchanges in Shanghai and Shenzhen and suggested a high degree of interdependence, indicating that the sectors are highly integrated and sector prices reflect information from other sectors. Berument et al. examined the long-run relationship properties of the sector indices of ISE and could not find any significant correlation among these indices. Under a similar spirit, Mohamad et al. investigated the opportunity for diversification across different economic sectors for long-term investment using sectoral indices of the Malaysian Stock Exchange. The results pointed out that although the returns of different industry sectors tend to be highly correlated, this correlation relationship is not stable. Hassan and Malik used a multivariate GARCH model to simultaneously estimate the mean and conditional variance among different US sector indices and found significant transmission of shocks and volatility among different sectors.