Long Run Relationships between Stock Market Returns and Macroeconomic Performance: Evidence from Turkey

The purpose of this study is to investigate whether current economic activities in Turkey have explanatory power over stock returns, or not. The data used in this study are monthly stock price indexes of Istanbul Stock Exchange and a set of macroeconomic variables, including money supply, exchange rate of US Dollar, trade balance, and the industrial production index. Engel-Granger and Johansen-Juselius co-integration tests and Granger Causality test were used in the study to explain the long-run relations among variables questioned. Obtained results illustrate that stock returns is co-integrated with a set of macroeconomic variables by providing a direct long-run equilibrium relation. However, the macroeconomic variables are not the leading indicators for the stock returns, because any causal relation from macroeconomic variables to the stock returns can not be determined in sample period. Contrarily, stock returns is the leading indicator for the macroeconomic performance for the Turkish case by supporting emerging market issues.