APPLIED ECONOMICS

2019, VOL. 51, NO. 20, 2143–2154

https://doi.org/10.1080/00036846.2018.1540850

Asymmetric effects of industrial production, money supply and exchange rate

changes on stock returns in Turkey
Ahmet Tiryakia, Reşat Ceylanb and Levent Erdoğanc
a
Open Education Faculty, Economics, Anadolu University, Eskişehir, Turkey; bFaculty of Economics and Administrative Sciences, Department
of Economics, Pamukkale University, Denizli, Turkey; cFaculty of Economics and Administrative Sciences, Department of Economics, Anadolu
University, Eskişehir, Turkey

ABSTRACT KEYWORDS
The aim of this article is twofold: First, it examines the asymmetric effects of industrial production, Monetary policy; economic
money supply and RER on stock returns in Turkey by using the non-linear autoregressive activity; non-linear ARDL;
distributed lag (NARDL) model over the periods of 1994:01–2017:05 and 2002:01–2017:05. stock returns
Second, it tries to determine whether there is a change of these macroeconomic variables’ effects
JEL CLASSIFICATION
on stock returns after the 2001 financial crisis since after 2002 period represents a structural break
E52; C32; G10; E44;
from the past in terms of economic, political and macroeconomic policy approaches. The study
finds that the effects of the changes in industrial production, money supply and RER on stock
returns are asymmetric, and the asymmetries are larger after the 2002 subsample compared to
the full sample period. The empirical results further suggest that tight monetary policies appear
to retard the stock returns more than easy monetary policies that stimulate them.

I. Introduction
It is important to look into asymmetries in the
This article is an empirical examination of non- stock price adjustment process, as suggested by
linear dynamic interactions between selected Koutmos (1998, 1999) showing that stock prices
macroeconomic variables of industrial production, respond to bad news faster than the good news.
money supply and real broad effective exchange Studies from Lobo (2000), suggesting asymmetric
rate and the stock returns in Turkey. Examining reaction of stock returns to interest rate cuts and
such relationship is important since the changes in hikes, Bahmani-Oskooee and Saha (2015, 2016)
stock market returns affect aggregate effective and Ajaz et al. (2017) all present asymmetrical
demand, which in turn has an impact on the effects of the changes in macroeconomic variables.
economic and monetary policy decisions that tar- Bernanke and Kuttner (2005), Chen (2007), Ismail
get both the interest rate and the RER as Gavin and Isa (2009), Chulia, Martens, and Dijk (2010),
(1989) argues. Theoretical works such as the effi- Zare and Azali (2015) and Ajaz et al. (2017)
cient market hypothesis by Fama (1970) and the showed the asymmetrical link between monetary
arbitrage pricing theory by Ross (1976) have been policy and stock prices indicating that tight and
used to study the impact of changes in macroeco- easy monetary policies appear to have a different
nomic variables on stock market returns. As listed impact on the stock prices. The results of these
in related sections below, many previous studies international studies show that a tight monetary
by using various econometric methods studied the policy has a more strong effect than the effect of
link between macroeconomic fundamentals and easy monetary policies on stock prices.
stock market response by assuming a symmetrical The current domestic and international literature
relationship between the dependent and indepen- review shows that there exist various studies show-
dent variables. It could be the case that this ing the symmetrical relationship between macroeco-
assumption is wrong and the relationship can be nomic variables and the stock returns, but the
asymmetrical. studies showing asymmetrical relationship is limited

CONTACT Ahmet Tiryaki [email protected] Open Education Faculty, Economics, Anadolu University, 26470 Yunus Emre Campus,
Eskişehir, Turkey
© 2018 Informa UK Limited, trading as Taylor & Francis Group
2144 A. TİRYAKİ ET AL.

in international literature specifically presenting prices are positively related. An increase in eco-
asymmetrical relationship between interest rate and nomic activity is expected to lead to an increase in
stock returns (Lobo 2000) or between monetary higher corporate earnings, hence an increase in
policy and stock returns (Bernanke and Kuttner stock returns. The stock returns–real economic
2005; Chen 2007; Ismail and Isa 2009; Chulia, activity causal relationship can be discussed as
Martens, and Dijk 2010; Zare and Azali 2015; Ajaz follows: First, the output may affect stock prices
et al. 2017). So far, there is no Turkish and interna- through its impact on profitability since the
tional empirical study exist showing the asymmetri- increase in output may boost cash flow and
cal relationship between stock returns and the hence enhance stock prices. Alternatively, there
macroeconomic variables of industrial production, is a link from the effects of major stock market
monetary policy and the RER. fluctuations on consumption and investment and,
The main contribution of the article is twofold: thus, may lead to an increased output.
First, this study is one of the first attempts to The IPI has been used as a proxy for measuring
examine the non-linearity and asymmetry in indus- economic activity. By using IPI as a measure of
trial production index (IPI), money supply (M3) economic activity, Chen, Roll, and Ross (1986) for
and RER on stock market returns in Turkey by the USA and Mukherjee and Naka (1995) for Japan
using non-linear ARDL (NARDL) model. Second, found a positive relationship between stock returns
the study tries to determine whether there is a and real economic activity. This relationship is also
change in these macroeconomic variables’ effects supported by the other empirical studies of Fama
on stock returns after the 2001 financial crisis. (1990), Schwert (1990), Mahdavi and Sohrabian
This separation of the periods is important since (1991), Abdullah and Hayworth (1993), Gallinger
after 2001 period represents a structural break from (1994), Apergis (1998), Levine and Zervos (1998),
the past in terms of political stance and applied Kwon and Shin (1999), Nasseh and Strauss (2000),
macroeconomic policies. Ratanapakorn and Sharma (2007), Shahbaz, Ahmed,
The empirical study results show that the effects and Ali (2008), Humpe and Macmillan (2009),
of the changes in IPI, M3 and RER on stock Vazakidis and Adamopoulos (2009), Kumar and
returns are asymmetric and the effects and this Padhi (2012) and Pradhan et al. (2013), among
asymmetry are larger after the 2002 period com- others. Further, Mahdavi and Sohrabian (1991),
pared to the full period of 1994–2017. Also, the Dhakal, Kandil, and Sharma (1993) and Gallinger
results are consistent with the theory and in line (1994) note that asymmetric causation runs from
with the empirical results. stock returns to real economic activity. On the
This article is organized as follows: the litera- other hand, Naceur, Ghazouani, and Omran (2007)
ture survey includes both the surveys of interna- and Sahu and Dhiman (2011) investigated the causal
tional and Turkish stock market theoretical and relationship and the direction of causality between
empirical studies. Then, the econometric metho- stock market development and economic growth, in
dology and data are discussed. Empirical findings India, and found no causal relationship.
and policy implications finalize the article. The literature about the relationship between
monetary policy and stock prices presents vast evi-
dence that monetary policy has a significant impact
II. Theoretical background and the literature
on asset prices. These empirical studies include
review
Cassola and Morana (2004), Ewing, Payne, and
Economic theory suggests that stock prices reflect Forbes (1998, 2003), Thorbecke (1997), Kwon and
the investors’ expectations about the future firm Shin (1999), Bernanke and Kuttner (2005),
profits. In this sense, profits reflect the level of Ratanapakorn and Sharma (2007), Farka (2009),
aggregate economic activity. Influential works of Chulia, Martens, and Dijk (2010) and Kumar and
Fama (1970) and Ross (1976) have been used as a Padhi (2012).
theoretical base to study the impact of changes in According to the Monetarist and Keynesian
macroeconomic variables on stock market returns. views, monetary policy changes can influence the
Theoretically, the economic activity and stock stock prices. There could be a positive and
 APPLIED ECONOMICS 2145

negative relationship between money supply and economic activity and between economic
changes and stock returns. From the monetarist activity and stock prices. Finally, exchange rates
point of view, an expansionary monetary policy may influence stock prices through interest rate
change causes an increase in stock prices since it effects. Aggarwal (1981), Choi (1995), Kwon and
increases the optimum money balances and hence Shin (1999), Ratanapakorn and Sharma (2007)
increases the demand for equities. Keynesian the- and Tripathy (2011) show that the stock prices
ory indicates that the fall in interest rates, resulting are positively related to a real depreciation of
from an expansionary monetary policy change, exchange rate.
makes bonds less attractive than equities, causing Various studies look at the link between macro-
the price of equities to rise. Also, the increase in economic variables and Turkish stock returns.
money supply leads to a decrease in interest rates, Erdem, Arslan, and Erdem (2005) analysed the
hence to an increase in investment and GDP and price volatility spillovers in Istanbul Stock indexes
eventually to an increase in stock prices. Kwon for the exchange rate, interest rate, inflation,
and Shin (1999), Ratanapakorn and Sharma industrial production and M1 money supply and
(2007) and Kumar and Padhi (2012) show that found unidirectional strong volatility spillover
the stock prices are positively related to the from inflation and interest rate to all stock price
money supply. However, Fama (1981) argues indexes. Also, they found spillovers from M1
that an increase in money supply could lead to money supply to financial index and from
inflation which in turn might decrease stock exchange rate to both IMKB100 and industrial
prices. Empirical literature supports both effects. indexes. The study finds no volatility spillover
However, there is a general agreement in the lit- from industrial production to any index.
erature that a decrease in the money supply is Acikalin, Aktas, and Unal (2008) find unidirec-
associated with a decline in stock returns. tional positive relationship from GDP and
Another variable which is included in this study exchange rate to the Turkish stock returns.
is the real effective exchange rate (RER). Kandır (2008) finds that exchange rate affects all
Theoretically, change in exchange rate affects the of the portfolio returns, but IPI and money supply
global performances of the firms which will affect do not appear to have any significant effect on
their share prices. As Tiryaki, Erdoğan, and stock returns. Aydemir and Demirhan (2009)
Ceylan (2017) argue, there are many explanations found a bidirectional causal relationship between
for a stock price–RER relationship. First, changes exchange rate and all stock market indices. Also,
in exchange rates may affect the value of firms’ they found negative causal relationship from
portfolios and firms’ stock prices. Second, there exchange rate to all stock market indices. Özlen
exists a negative relationship between stock prices and Ergun (2012) found that the exchange rate
and the home currency for export-oriented coun- and interest rate are the most significant factors in
tries. If exports are important for a country, the the stock price fluctuations of the firms. Tiryaki,
exchange rate appreciation lowers its competitive- Erdoğan, and Ceylan (2017) find that IPI (posi-
ness and negatively affects domestic stock prices. tive) and RER (negative) have significant effects
However, theoretically, a real currency deprecia- on Turkish stock returns.
tion may affect the share prices in both directions. All above-mentioned literature about the stock
For the firm level, the exporting firms gain inter- returns mostly assumed that there is a linear rela-
national competitiveness as a result of a real tionship between dependent variable and explana-
depreciation and export more, and they are tory variables. However, it is important to look
expected to make more profit and their share into asymmetries in the stock price adjustment
prices increase as a result. On the other hand, process, as suggested by Koutmos (1998, 1999),
the firms that import inputs face an increase in Lobo (2000), Bahmani-Oskooee and Saha (2015,
their input costs and experience a decline in their 2016), Bernanke and Kuttner (2005), Chen (2007),
profits and hence their share prices are expected to Ismail and Isa (2009), Chulia, Martens, and Dijk
decrease. Third, there could be an indirect link (2010), Zare and Azali (2015) and Ajaz et al.
due to the relationship between exchange rates (2017).
2146 A. TİRYAKİ ET AL.

III. The data and methodology supply in Turkey is endogenous; that is, the central
bank and the banks fully meet the total demand for
The study uses monthly data for Turkey covering
money in the Turkish economy. According to them,
two sample periods: The full-sample period of
if the money supply is exogenous, ‘central banks will
1994:01–2017:05 and the subsample period of
have full control over money supply via policy
2002:01–2017:05. Besides the full sample period,
actions including the adjustments of interest rates
the subsample period of 2002–2017 is chosen in
and reserve ratios, both of which alter commercial
order to see whether there is a structural break
banks’ lending decisions’ (Guney and Cepni 2016).
after the 2001 economic and financial crisis in
However, in the case of the endogenous money
Turkey. After the 2001 crisis, the economic and
supply, the demand for bank loans in money crea-
political policies have changed, and compared to
tion is essential. ‘More specifically, banks create
pre-2002 conditions, the Turkish macroeconomic
money by meeting the demand of economic agents’
variables are less volatile. All the variables used in
(Guney and Cepni 2016). From their conclusions, it
the study that are expressed in natural logarithm
can be inferred that the narrow monetary aggregates
are the Borsa Istanbul share price index
cannot be used to represent the money supply, and
(BIST100), IPI, money supply (M3) and real
the M3 can be accepted as the broad monetary
broad effective exchange rate (RER) of Turkey.
aggregate to represent the stance of monetary policy
The monthly data are obtained from the databases
of the central bank.
of the Central Bank of the Republic of Turkey
The RER is used to represent both the interna-
(CBRT), the Federal Reserve Economic Data
tional trade link of the country and the global eco-
(FRED) of the Federal Reserve Bank of St. Louis
nomic and political change effects on the country.
and the OECD.
This study uses the NARDL model to analyse the
The BIST100 index is the Borsa Istanbul’s lar-
existence of asymmetric effects of IPI, M3 and RER
gest share price index composed of national mar-
on BIST100 stock returns in Turkey. The NARDL
ket companies except investment trusts. The
model is used for testing potential asymmetric
BIST100 includes the largest financial and indus-
effects in the short run and the long run. There are
trials indices in Turkey. Thus, the use of this share
some advantages of the NARDL model. First, it
price index represents the Turkish stock returns,
relaxes the usual assumption in the cointegration
in general, to be used in such study.
analysis that all variables must be integrated of the
In the study, benefiting from economic literature
same order except I(2) variables. Second, ‘the
in general and the literature about the Turkish eco-
NARDL framework enables testing for hidden coin-
nomic developments, it is assumed that the main
tegration so that it avoids omitting any relationship
determinants of the Turkish stock returns are the
which are not visible in a conventional linear setting.
IPI, M3 and RER. In order to represent economic
Thus, the NARDL model allows to distinguish the
activity in Turkey, monthly data of IPI are used to
existence of linear cointegration, nonlinear/asym-
see their effect on stock returns. M3 money supply is
metric cointegration and lack of cointegration’
chosen to see the monetary policy stance of the
(Shahzad et al. 2017).
CBRT. Berument, Togay, and Şahin (2011),
The NARDL model is an asymmetric extension
Berument, Denaux, and Yalçın (2012) and Kılınç
of the linear ARDL model proposed by Pesaran and
and Tunç (2014) use the M3 monetary aggregate to
Shin (1999) and Pesaran, Shin, and Smith (2001).
represent the stance of monetary policy in Turkey,
The unrestricted error-correction model in the lin-
and Canova and Favero (2005) include the
ear ARDL model takes the following form:
announcement of a quantitative reference value for
M3 growth for European Central Bank. According
X
p1
to Berument, Togay, and Şahin (2011,) the broader Δyt ¼ δ0 þ σyt1 þ #xt1 þ μi Δyti
monetary aggregates are the measures of liquidity i¼1
and are affected by the state of the economy as well X
q1

as by the country’s monetary policy. Besides these, þ βi xti þ εt (1)

i¼0
Guney and Cepni (2016) conclude that the money
 APPLIED ECONOMICS 2147

where yt is the dependent variable. xt is a k x 1 Shin, and Smith (2001) to test the existence of
vector of regressors. The parameters of σ and # an asymmetric long-run relationship among the
represent the long-run and the parameters of μi levels of the series yt , xþ 
t and xt . Thus, FPSS
and βi represent the short-run coefficients, respec- refers to the joint null hypothesis of no coin-
tively. The εt is the error term. tegration against the alternative of cointegra-
The NARDL model decomposes the vector of tion. It can be expressed as:
regressors (xt ) into its positive and negative partial
sums. The decomposition of the xt can be written H0 : σ ¼ #þ ¼ # ¼ 0 (5)
as follows:

xt ¼ x0 þ xþ  H1 : σÞ#þ Þ# Þ0 (6)

t þ xt (2)
In Equation (2), x0 denotes the initial value. Third, the null hypothesis is # ¼ #þ ¼ # for the
P
t
þ
Pt P
t P þ q1
q1 P 
xþ
t ¼ Δx i ¼ max ðΔx i ; 0Þ and x 
t ¼ Δx
i long-run symmetry and β ¼ β for the
i¼1 i¼1 i¼1 i¼0 i¼0
P
t short-run symmetry is tested by employing the
¼ minðΔxi ; 0Þ are positive and negative partial Wald test. Fourth, Equation (4) is utilized to
i¼1
sums. derive asymmetric cumulative dynamic multipliers
Non-linear asymmetric long-run cointegrating effect on yt , of the change in xþ 
t and xt . This
regression in the NARDL model is written as: process is written as:

yt ¼ λþ xþ  
t þ λ xt þ et (3) X
h @y X
h @y
mþ ; and m
tþj tþj
h ¼ h ¼ (7)
In Equation (3), et denotes the deviations from the j¼0
@xþ
t j¼0
@x
t

long-run equilibrium. λþ and λ represent the

long-run coefficients associated with the positive where ðh ¼ 0; 1; 2 . . . ::Þ. For Equation (7), if
þ 
and negative changes in xt , respectively. Then, the h ! 1, then mþ 
h ! λ and mh ! λ , the long-
asymmetric error correction model can be written run coefficients of λþ and λ are computed as λþ ¼
 #σ and λ ¼  #σ .
þ 
as by combining Equations (1) and (3) as follows:
Δyt ¼ δ0 þ σyt1 þ #þ xþ   The NARDL model is estimated in the study
t1 þ # xt1
X
p1 that covers the short and long run of the positive
þ μi Δyti and negative partial sums. Thus, the NARDL
i¼1 model takes the following equation form:
X
q1
 
þ βþ þ  
i Δxti þ βi Δxti þ εt (4) ΔBIST100t ¼ δ0 þ σBIST100t1 þ #þ þ
i¼0 1 IPIt1
þ #  þ þ
1 IPIt1 þ þ#2 M3t1
In Equation (4), both dependent and explanatory
variables are defined as #þ ¼ σλþ and þ #  þ þ  
2 M3t1 þ #3 RERt1 þ #3 RERt1

# ¼ σλ , and βþ  X
p1 X
q
i and βi are the short-run þ μi ΔBIST100ti þ βþ þ
1;i ΔIPIti
adjustments to positive and negative changes in i¼1 i¼0
the explanatory variables xt . X
q X
q
Following Shin, Yu, and Greenwood-Nimmo þ β 
1;i ΔIPIti þ βþ þ
2;i ΔM3ti
(2014), in order to test the short- and long-run i¼0 i¼0

asymmetric effects of IPI, M3 and RER on Xq X q

þ β 
2;i ΔM3ti þ βþ þ
3;i ΔRERti
stock returns, the NARDL model has to take i¼0 i¼0
the following steps. First, Equation (4) should Xq
be estimated by standard OLS. Second, the þ β 
3;i ΔRERti þ εt
bounds test approach can be applied by using i¼0

the F-statistics ðFPSS Þ developed by Pesaran, (8)

2148 A. TİRYAKİ ET AL.

IV. The empirical results Table 2. Bounds test for cointegration.

F-statistics Bounds critical
The results of the unit root tests Dependent variable ðFPSS ) value** Outcome
Full sample (1994–2017) I(0) I(1)
The break-point unit root tests are used to deter- LBIST100 = f(IPI, M3, RER) 9.016561* 3.23 4.35 Cointegration
Subsample (2002–2017)
mine the order of integration at level and first LBIST100 = f(IPI, M3, RER) 7.173297* 3.23 4.35 Cointegration
difference under the assumption of the presence *' indicates the null hypothesis of no cointegration at 5%.
of intercept for both periods. Different from the '**'The bounds critical values are taken from Pesaran, Shin, and Smith
(2001) with unrestricted intercept and no trend.
standard ADF and Phillips–Perron unit root tests,
the structural break-point unit root tests allow us
to find stationarity in time series in case of the The bounds test for cointegration
existence of structural breaks, since ignoring the
existence of such breaks can lead us to false accep- Table 2 reports the results of the bounds test.
tance of unit roots as Perron (1989) argues. Also, Since the FPSS statistics exceeds the bounds critical
in order to observe structural breaks, the use of value at 5% significance level for full and subsam-
break-point unit root test is important since the ples, the null hypothesis of no cointegration is
2001 and 2008 financial crisis in Turkey could rejected. Test results imply that there is long-run
have created such breaks in Turkish data. The cointegration relationship between stock returns
Zivot and Andrews (1992) test is also applied, and the variables of IPI, M3 and RER.
but the results are the same with the reported Table 3 shows the Wald test results to see the null
outcomes. Table 1 reports the break-point unit hypothesis of long-run symmetry against the alterna-
root test results. For the full sample period, the tive of asymmetry between the BIST100 stock returns
RER is level stationary, while all the other vari- and selected macroeconomic variables in the NARDL
ables are stationary at the first differences. For the model. Based on the results, for the full and subsam-
subsample period, all variables are stationary at ple, the null hypothesis of long-run symmetry can be
the first differences. The unit root test results rejected at the 5%. So, the results indicate that the IPI,
provide a strong justification for the use of the M3 and RER have asymmetrical effects on BIST100
NARDL model because all dependent variables are stock returns for the full and subsample periods.
I(1) and all the variables are not found to be I(2).

The NARDL estimation results for BIST100 stock

returns
Table 1. Break-point unit root test results.
ADF Test Statistics Break-date In order to estimate the long-run asymmetrical
First relations between the BIST100 stock returns and
Level difference First
Variables (Intercept) (Intercept) Level difference Decision
FULL SAMPLE (1994–2017) Table 3. The Wald test results.
LBIST100 −3.313835 −14.05392 1998M10 2000M1 I(1)
(−4.432140) (−4.432140) Variables Long-run asymmetry
LIPI −2.691044 −24.74055 2001M12 2001M12 I(1) FULL SAMPLE (1994–2017)
(−4.432140) (−4.432140) BIST100
LM3 −2.797010 −19.37642 2001M10 2001M10 I(1) LIPI 4.609252
(−4.432140) (−4.432140) (0.0328)
LRER −4.747573 −11.92557 2002M8 2008M1 I(0) LM3 5.979542
(−4.432140) (−4.432140) (0.0152)
SUB-SAMPLE (2002–2017) LRER 12.23884
LBIST100 −3.023041 −11.22018 2009M3 2006M2 I(1) (0.0006)
(−4.432140) (−4.432140) SUB-SAMPLE (2002–2017)
LIPI −3.210827 −16.92685 2009M3 2007M2 I(1) BIST100
(−4.432140) (−4.432140) LIPI 11.88607
LM3 0.020711 −9.668962 2006M6 2006M6 I(1) (0.0007)
(−4.432140) (−4.432140) LM3 6.862026
LRER −3.719957 −9.594212 2004M6 2008M1 I(1) (0.0096)
(−4.432140) (−4.432140) LRER 10.90439
The numbers in parentheses indicate the critical values at 5% significance (0.0012)
level. The optimal lag structure is chosen based on the Schwarz informa- The numbers in parentheses are p-values and denote the rejection of the
tion criterion (SIC). null hypothesis of long-run symmetry at the 5% significance level.
 APPLIED ECONOMICS 2149

Table 4. The NARDL estimation results for the IPI causes 1.47% increase in BIST100 returns, a
BIST100 full sample period. 1% increase in M3 causes 0.61% increase in
Dependent variable = LBIST100
BIST100 returns. On the other hand, a 1%
Prob.
Variable Coefficient SE t-Statistics values decrease in M3 causes a 7.25% decrease in
Full sample (1994–2017) BIST100 returns. These results about the changes
C 0.838407 0.175079 4.788723 0.0000
LBIST100(−1) −0.175044 0.031642 −5.532021 0.0000 in M3 show that positive changes in M3 cause an
LRER_P(−1) −0.027070 0.111680 −0.242392 0.8087 increase in BIST100 returns, but negative changes
LRER_N(−1) 0.258171 0.083364 3.096895 0.0022
LIPI_P(−1) 0.257581 0.094826 2.716349 0.0071 in M3 cause a decrease in stock returns, and the
LIPI_N(−1) 0.037699 0.110940 0.339817 0.7343 effect of a decrease in M3 is much larger than the
LM3_P(−1) 0.107851 0.043763 2.464434 0.0144
LM3_N(−1) −1.269157 0.479784 −2.645267 0.0087 increase in M3 on BIST100 returns. Regarding the
DLBIST100(−1) 0.316614 0.055287 5.726687 0.0000 effect of the RER changes, a 1% decrease in RER (a
DLRER_N 1.095235 0.238732 4.587716 0.0000
DLM3_P(−2) 1.566487 0.280565 5.583336 0.0000 real depreciation) causes a 1.47% increase in
DLRER_P(−6) 0.743268 0.254714 2.918051 0.0038
DLM3_N(−1) 2.578035 0.866240 2.976121 0.0032
BIST100 returns.
DLRER_N(−8) 0.513895 0.261200 1.967441 0.0502 Table 5 shows the estimation results for
DLM3_N(−8) 2.104187 0.895500 2.349734 0.0196
DLIPI_N(−2) 0.658916 0.239262 2.753956 0.0063 BIST100 for the subsample period. For the sub-
DLRER_P 0.740599 0.284833 2.600113 0.0099 sample period, the positive changes in IPI and
DLM3_P(−9) 0.342380 0.223795 1.529880 0.1273
DLM3_P(−8) 0.637867 0.288165 2.213544 0.0278 RER and the negative changes in M3 and RER
DLBIST100(−3) 0.124320 0.053463 2.325332 0.0209 have statistically significant asymmetrical effects
DLM3_P(−10) 0.445520 0.205016 2.173101 0.0307
Long-run asymmetric effects on BIST100 on BIST100 returns. Based on the results reported
LIPI_P 1.471524* 0.459913 3.199569 0.0016* in Table 5, a 1% increase in IPI increases BIST100
LIPI_N 0.215372 0.616321 0.349447 0.7271
LM3_P 0.616136* 0.183597 3.355924 0.0009* returns by 2%. On the other hand, a 1% decrease
LM3_N −7.250516* 3.317582 −2.185482 0.0298*
LRER_P −0.154649 0.646042 −0.239379 0.8110
in M3 leads to 11.22% decrease in BIST100
LRER_N 1.474893* 0.383469 3.846191 0.0002* returns. Regarding the effect of the RER changes,
Statistics and Full sample (1994:01–2017:05)
diagnostics a 1% increase in RER decreases BIST100 returns
Adj: R2 0.399806** by 1.91% and a 1% decrease in RER causes a
χ 2 LM 10.74459 (0.5509)***
χ2 H 263.4101 (0.0537)*** 2.45% increase in BIST100 returns. The negative
'*' indicates the level of significance at 5%. and positive changes in RER on BIST100 returns
'**'Adj: R2 represents the estimated value of the adjusted R2 coefficient in have correct signs in line with the theoretical
the model.
'***'χ 2 LM and χ 2 H denote the Breusch–Godfrey serial correlation LM tests expectations, and the effect of a decrease in RER
and heteroscedasticity, respectively. on BIST100 returns is much higher than the
LM: Lagrange Multiplier.
increase in the RER.
On the bottom parts of Tables 4 and 5, the
explanatory variables for full and subsamples, the diagnostic tests of estimated NARDL model are
NARDL method is used. The estimation results presented. The test for
 2the
 Breusch–Godfrey serial
 test χLM
are presented in Tables 4 and 5, and the statisti- correlation and the heteroscedasti-
 LM
cally significant long-run estimation results ana- city test χ2H results indicates that there exist no
lysed with details for BIST100 in the following serial correlation and heteroscedasticity so that the
section. Overall, all results present the existence NARDL model used in the study is well specified.
of asymmetrical effects of the changes in the inde-
pendent factors, and the results are in line with the
economic theory.
The dynamic multipliers: response of the BIST100
Table 4 shows the estimation results for
stock returns
BIST100 for the full sample period. In this period,
the positive changes in the IPI and M3 have sta- Besides the long-run NARDL estimation results,
tistically significant effects on BIST100 returns. the dynamic multipliers can further summarize
Additionally, negative changes in M3 and RER and explain the analysis of the dynamic effects of
also have significant asymmetrical effects on the explanatory variables on the stock returns.
BIST100 returns. Based on the NARDL estimation Figure A1 in the Appendix section plots the
results reported in Table 4, while a 1% increase in dynamic effects of positive and negative changes
2150 A. TİRYAKİ ET AL.

Table 5. The NARDL estimation results for the BIST100 subsample period.
Dependent variable = LBIST100
Variable Coefficient SE t-Statistics Prob. values
Subsample (2002:01–2017:05)
C 1.845045 0.385398 4.787381 0.0000
LBIST(−1) −0.186769 0.041050 −4.549843 0.0000
LRER_P(−1) −0.357987 0.161813 −2.212345 0.0283
LRER_N(−1) 0.458292 0.154162 2.972800 0.0034
LM3_P(−1) 0.247420 0.149657 1.653246 0.1002
LM3_N(−1) −2.096904 0.729680 −2.873732 0.0046
LIPI_P(−1) 0.373661 0.115926 3.223258 0.0015
LIPI_N(−1) −0.168227 0.120361 −1.397683 0.1641
DLRER_N 1.846239 0.228111 8.093614 0.0000
DLIPI_N(−5) 0.553609 0.308068 1.797032 0.0742
DLIPI_N(−2) 1.211503 0.294115 4.119145 0.0001
DLM3_N(−1) 4.187083 1.279706 3.271910 0.0013
DLM3_N(−2) 3.503405 1.224134 2.861946 0.0048
DLIPI_N(−1) 0.920892 0.297631 3.094067 0.0023
DLRER_P(−4) −0.912296 0.273948 −3.330174 0.0011
DLBIST(−1) 0.180570 0.071464 2.526732 0.0125
Long-run asymmetric effects on BIST100
LIPI_P 2.000658* 0.458966 4.359053 0.0000*
LIPI_N −0.900724 0.745766 −1.207783 0.2289
LM3_P 1.324739 0.719341 1.841602 0.0674
LM3_N −11.22727* 4.716762 −2.380291 0.0185*
LRER_P −1.916739* 0.974584 −1.966726 0.0509*
LRER_N 2.453793* 0.629528 3.897831 0.0001*
Statistics and diagnostics Subsample (2002:01–2017:05)
Adj: R2 0.430116**
χ 2 LM 14.13653 (0.2921)***
χ2 H 160.6533 (0.0653)***
'*' indicates the level of significance at 5%.
‘**’Adj: R2 represents the estimated value of the adjusted R2 coefficient in the model.
‘***’ χ 2 LM and χ 2 H denote the Breusch–Godfrey serial correlation LM tests and heteroscedasticity, respectively.

in IPI, M3 and the RER to the BIST100 stock negative changes (0.61% and −7.25%, respec-
returns. These multipliers show the pattern of tively), with adjustment to long-run equilibrium
adjustment of the Turkish stock returns to their occurring around the 18 months. More particu-
new long-run equilibrium following one-unit larly, the absolute effect of a decrease in M3 is
positive or negative shock in IPI, M3 and RER. larger than that of an increase.
Regarding the dynamic impacts of IPI changes For the subsample period, the dynamic multi-
on BIST100 returns for both sample periods, the pliers presented in Figure A1(e) reveal that only
study of the dynamic multipliers presented in negative changes in M3 cause BIST100 returns to
Figures A1(a,d), respectively, reveals that the respond. The BIST100 returns respond to the
positive changes in IPI cause stock returns to negative changes by −11.22%, with adjustment to
respond positively. The BIST100 returns respond long-run equilibrium occurring around the 12
mildly to positive changes in the IPI (1.47% and months. The absolute effect of a decrease in M3
2%), with adjustment to long-run equilibrium is larger in the subsample period than the full sam-
occurring around the 12-month time horizon. ple period. For the subsample period, the effect of
As it is seen from the Figure A1(a,d), the effect a positive change of M3 on BIST100 returns is
of a negative change in IPI on BIST100 stock statistically insignificant.
returns in both sample periods is statistically It is observed that stock returns of BIST100
insignificant. respond significantly only to decreases in RER
Regarding the dynamic impact of M3 changes for the full sample period as depicted in
on BIST100 returns for the full sample period, Figure A1(c), achieving long-run equilibrium
presented in Figure A1(b), the positive and nega- nearly after a 20-month time horizon. In the sub-
tive changes in M3 cause BIST100 stock returns to sample period, the dynamic multipliers presented
respond. The BIST100 stock returns respond less in Figure A1(f) reveal that both the positive and
to the positive changes in the M3 than the negative changes in RER cause BIST100 returns to
 APPLIED ECONOMICS 2151

respond. The BIST100 returns respond less to the economic theory. Like the findings of Koutmos
positive changes than the negative changes (1998, 1999), Bahmani-Oskooee and Saha (2015,
(−1.91% and 2.45%, respectively), with adjustment 2016), Ajaz et al. (2017), Bernanke and Kuttner
to long-run equilibrium occurring around the 6 (2005), Chen (2007), Ismail and Isa (2009),
months. Chulia, Martens, and Dijk (2010), Zare and Azali
(2015) and Ajaz et al. (2017), this study also finds
the asymmetrical link between monetary policy
V. Concluding remarks and policy implications
and stock returns in Turkey, indicating that tight
The study finds that the effects of the changes in and easy monetary policies appear to have a dif-
IPI, M3 and RER on stock returns are asymmetric, ferent impact on the stock returns and also asym-
and the effects and asymmetry of independent metrical link between changes (real appreciation
variables on stock returns are larger after the or depreciation) in RER and stock returns.
2002:01 period compared to the full period of The result of much larger and more pro-
1994:01–2017:05. Further, the results suggest that nounced asymmetrical effects of the contraction-
contractionary monetary policies appear to reduce ary monetary policy and currency appreciation on
the stock returns more than the expansionary stock returns in the subsample period compared
monetary policies stimulate them. Also, these to full period can be explained by the stance of
asymmetries are more pronounced in cases of monetary policy and the exchange regime in
contractionary monetary policy and currency Turkey after the 2002 period. After the 2001 finan-
appreciation occurred together. cial crisis, as Alp and Elekdağ (2011) argue, an
The results of NARDL estimations show that inflation targeting framework and a flexible
the increase in IPI in Turkey causes BIST100 stock exchange rate regime are in place. The economy
returns to increase. These results are consistent has been more stable, and the economic activity is
with the theory and in line with the empirical less sensitive to the external shocks than the pre-
results. By using IPI as a proxy for measuring 2001 period. All these developments have
economic activity, theoretically and empirically, increased the effectiveness of the central bank
it is expected that the economic activity and policies in Turkey.
stock prices are positively related. Such findings do have implications for policy-
The stance of monetary policy can be expansion- makers as well as market participants. Positive
ary or contractionary. Generally, the expansionary developments in economic activity, which are
monetary policy is designed to stimulate the eco- represented by increases in IPI, have positive
nomic activity through the traditional interest rate effects on market returns. This implies the
channel or the newer credit channel. An increase in requirement in physical capital investment for
money supply via these channels causes interest the stock returns to rise.
rates to decrease and leads to an expansion of the Policymakers who try to manage the interest
loan abilities of banks and credit borrowing abilities rate and the exchange rate will have a different
of the firms. The result is the increasing profit dose of intervention if they know that effects of
opportunities of the firms and, as a result, increas- the tight monetary policy are different from the
ing share prices and returns. So, it is expected a easy monetary policy or effects of currency depre-
positive relationship between a positive change in ciation are different from appreciation. Empirical
M3 and stock returns as this study’s results indicate. findings indicate that the easy monetary policy
The NARDL estimation results show that a and real depreciation of the currency together
real appreciation of the Turkish Lira (TL) (an improve the stock returns, while the opposite
increase in RER) in Turkey causes BIST100 shocks harm them. The harm of tight monetary
stock returns to decrease. These results are con- policy is much larger than the benefit of easy
sistent with the theory and in line with the policies. So, for a stable economic growth and
empirical results. stable positive stock returns, the expansionary
Findings of this article are in line with related monetary policies should be preferred compared
literature and with the expectations of the to the tight policies.
2152 A. TİRYAKİ ET AL.

Disclosure statement Chen, N. F., R. Roll, and S. A. Ross. 1986. “Economics Forces
and the Stock Market.” Journal of Business 59 (3): 383–403.
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Effects on Stock Returns?” Journal of Money Credit and
Banking 39 (2–3): 667–688.
Choi, J. J. 1995. “The Japanese and US Stock Prices: A
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Appendix

Figure A1. Dynamic multiplier for BIST100. (a) A positive shock from industrial production index (full sample). (b) A positive and
negative shock from money supply (full sample). (c) A negative shock from real effective exchange rate (full Sample). (d) A positive
shock from industrial poduction index (subsample). (e) A negative shock from money supply (subsample). (f) A positive and
negative shock effective exchange rate (subsample).