Measurement of Foreign Exchange Exposure on the Turkish Private Banks’ Stock Prices

All performance criteria of the banks are affected by the exchange rate fluctuations through foreign currency transactions and operations. However, exchange rate fluctuations -even without such activities can influence the banks through their affect on foreign competition, foreign loan demand and other banking conditions. Exchange rate exposure is classified as operation, transaction, and accounting exposures. Most of the studies, which measure these exposures, focused on the affect of the exchange rate exposure on the value and stock price of the firm. High inflation rates, a highly volatile foreign exchange market, increasing tendency of the banking system to work with exchange rate exposure and the absence of sufficient instruments to cover the exchange rate risk can explain the importance of the foreign exchange exposure in Turkey. Turkish banking system that is the biggest actor in the financial system operates with exchange rate exposure and therefore it is important to analyze the effect of the exchange rate risk on the Turkish banking system. For this purpose, a cointegration model has been estimated to analyze the effect of unanticipated changes in the exchange rate on the stock prices of the 11 commercial banks, which were quoted in the Istanbul Stock Exchange Market.