The Impact of Custom Union Agreement on the Integration of Turkish Stock Market with the Major Trading Partners in Europe

This paper investigates the existence of long-run relations between the Turkish stock market and five major stock markets of Europe and the US before and after the Customs Union (CU) of 1996, for the period 1988-2006, using both conventional cointegration tests of Engle and Granger (1987) and Johansen (1988), and Gregory and Hansen (1996) tests that controls for a structural break in long-run relations. The US is added to the analysis to examine the integration of Turkish stock market to the global markets. Conventional cointegration tests results indicate that the Turkish stock market is not integrated with five European and the US stock markets before and after the CU. Gregory and Hansen (1996) residual-based cointegration test results, however, show evidence of greater integration among the Turkish, French, Italian and German stock markets for the postCUperiod after controlling for structural changes.