The Impact of Crises: Evidence from the Istanbul Stock Exchange

Abstract

Stock markets are the barometers of an economy. They are very sensitive to the news and can measure economic pressures to forecast economy. They react momentarily to crises that might be triggered by such events as a currency crisis, a debt crisis, a political crisis, or an accounting fraud crisis. According to technical analysts, drastic decreases in stock prices recover from their crash value rapidly since these decreases are realized with low traded values. The overreaction hypothesis affirms that extreme price movements are subsequently adjusted by opposite direction. This chapter analyses these assertions by measuring the impacts of the crises on the Istanbul Stock Exchange (ISE) over the last decade. The duration of the crises and weekly negative abnormal percentage returns in the period of 01.01.2000-31.12.2011 are analyzed using a regression model. In this period, from a total of 621 weeks, 277 weeks have negative returns, 93 of which are identified as negative abnormal returns. The results are statistically significant, and suggest that the duration of the crises is related to the magnitude of negative returns. On the other hand, research shows that the duration of the crisis and traded value are positively correlated. This study offers empirical observations that would be useful for technical analysts and stock investors.