Investigation for the Role of Oil and Natural Gas in the BIST Sector Indexes in Turkey

Introduction

Apart from the increasing developments in renewable energy sources, oil and natural gas have still been at the forefront of energy sources. As for energy importing countries, an increase in oil and natural gas prices induces cost-push inflation and higher unemployment creating economic imbalance because many industries and social life are profoundly dependent on oil and natural gas as input. Besides, economic imbalances created by extensive energy prices harm countries' competitiveness because the industries' growth and performance are closely associated with the input cost (Eksi et al., 2012; Mikayilov et al., 2020; Liu et al., 2021).

Along with the first oil crisis that occurred in 1973, the effects of oil prices on macroeconomic activity have been introduced to massive attention by policy-makers, researchers, and investors. Among these investigations, a milestone study conducted by Hamilton (1983) reaches a piece of evidence that there is an essential correlation between an increase in oil prices and the US recession. Following this pioneering study, various studies were managed to investigate the relationship between oil price changes and different macroeconomic indicators such as inflation, unemployment, and industrial performance (Hamilton, 1983; Bohi,1991; Goldfajn & Werlang, 2000; Hooker, 2002). According to the investigation, oil appears as the primary fuel of industrial activity, and change in oil price plays an essential role in growing the countries' political and economic structure. Regarding the literature, the topics linked to the connection between the stock market and the energy price changes have been among the leading topics because the companies' revenues and costs are entirely affected by a change in energy prices. The prime studies investigating the role of the energy prices on the stock market returns were conducted by Jones & Kaul (1996) and Huang et al. (1996). According to them, equities are prices associated with the market valuation based on the expected profits and firms' performance. Moreover, energy is one of the most vital production factors, and an increase in energy prices leads to the rise of the production costs, which have a detrimental effect on the cash flows and companies' market values which induces the decline in the overall stock market returns regarding companies operating in energy-importing countries (Berk & Aydogan, 2012; Yu et al., 2020). Therefore, observation of energy price changes and understanding more detailing connections between energy prices and stock market performance can allow a piece of information to forecast equity prices (Asteriou et al., 2013).

The main objective of the present paper is to investigate the relationship between energy prices involving oil and natural gas prices on the stock market performance in Turkey by accounting for the possible structural breaks. Turkey is an interesting case because The Turkish economy is highly reliant on oil and natural gas imports, and the stock market in Turkey has received substantial foreign funds, which are used to overcome the country's traditional bottlenecks such as low savings. We use two different energy prices within this aim, including Brent oil and natural gas real-time future prices, and we also decide on three sector indices consisting of BIST Industrials (XUSIN), BIST Chem-Petrol Plastic (XKMYA), and BIST Electricity (XELKT) which is entirely linked to energy as user input or output. Besides, Fourier cointegration test developed by Tsong et al. (2016) is applied because of its several advantages, such as the halting of the structural breaks on the cointegration test power. Therefore, this study will produce essential information for investors and managers with the help of using different variables and contemporary econometric techniques.

This study involves seven sections. Following this introduction part, the second section presents a theoretical framework related to the relationship between energy prices and the stock market. Additionally, the third provides the literature, and the fourth section includes data and methodology. Moreover, the fifth section delivers the analysis results, and the sixth and the seventh section provide solution-recommendation and future research directions, respectively. The final part is related to the conclusion.