(Integration of BIST and Stock Exchanges of Countries Having High Foreign Trade Volumes with Turkey: Empirical Evidence from Regime Shift Cointegration Analysis)

Abstract

Purpose – The aim of this study is to examine the existence of a cointegration relationship under structural breaks, between Turkey and stock indices of seven countries that has a key impact over Turkey's foreign trade. Design/methodology/approach – Long term relationship between Turkey and the seven countries stock indexes for January 2000-May 2019 period is examined by Lee and Strazicich (2003) two structural breaks unit root test and Hatami-J (2008) cointegration test. Findings – According to Dickey-Fuller (ADF; 1981), Phillips-Perron (PP; 1988) and Lee and Strazicich (2003) unit root test results, the degree of integration of the series was determined as I(1). Hatemi-J (2008) cointegration test with two structural breaks shows that there is a long-term relationship between BIST100 and DAX 30, FTSE 100, IMOEX, CAC 40 and S&P 500, while there is no long-term relationship wtih FTMIB and IBEX 35. Discussion – The results of the cointegration test indicate that for different break periods there are different relationships between BIST 100 and five of the seven stock exchanges (DAX 30, FTSE 100, IMOEX, CAC 40 and S&P 500), this denotes that the structural changes occurring in the analysis period have an effect on the relationship between stock market indices. In addition, investors will be able to reduce their risks by investing in stock exchange indices which has not long term relationship (cointegration), in other words non-cointegrated instruments are suitable for portfolio diversification.