The Relationship Between Stock Market Indices of the Biggest Six Economies of the European Union and BIST 100

The Relationship Between Stock Market Indices of the Biggest Six Economies of the European Union and BIST 100

Serdar Ögel (Afyon Kocatepe University, Turkey) and Fatih Temizel (Anadolu University, Turkey)
DOI: 10.4018/978-1-7998-1188-6.ch016
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This chapter examines the relationship between stock market indices of the biggest six economies of the European Union and BIST 100. In this context, this study used the daily time series regarding indices of DAX for Germany, CAC 40 for France, FTSE MIB for Italy, IBEX 35 for Spain, AEX for Holland, FTSE 100 for United Kingdom, and BIST 100 for Turkey from 2014 to 2018. To test whether there is a co-integration relationship among indices, Johansen co-integration test was used. Since a co-integration relationship was not found between series, causality relationship between the European stock market indices and Turkey was tested with Granger causality test by establishing standard VAR model. As a result, a unidirectional Granger causality relationship was found from DAX, FTSE 100, CAC 40, IBEX 35, and AEX to BIST 100 according to lag length 1 and 2. However, a unidirectional Granger causality relationship was only found from FTSE MIB to BIST 100 for lag length 1. For lag length 1 and 2, no causality relationship was found from BIST 100 to the selected European stock market indices.
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The prices in financial markets are generally affected the portfolio decisions of investors who actively invest in more than one market. These decisions are frequently influenced by continuous flow of information which leads to increase in volatility of prices both in the market and among the other markets (Çiçek, 2010). The increasing number of multinational corporations, developing international commerce network and the presence of several politic and economic unions has enhanced the trends towards integration between capital markets in the global word (Güloğlu & Kaya, 2018). Additionally, particularly for the last thirty years, the developments observed in financial markets and stock markets, increase in the effectiveness and efficiency in brokering service, electronic data interchange and securities quoted on several stock markets have led to increase in integration process among financial markets (Vuran, 2010). This case necessitates the analysis of the financial markets of countries by using not only the country-specific factors but also using the factors regarding other countries with which the country has interaction. Additionally, as the flow of capital among financial markets increases, the integration among the markets enhances. So, this leads to equalization of return of capital for all countries and disappearance of arbitrage possibility (Boztosun & Çelik, 2011).

The continuous increase in the level of integration of capital markets with each other is a critical factor which should be taken into consideration for international portfolio investors who make portfolio diversification in different markets to reduce risks. If there is co-integration relationship between the capital markers of two countries, there will be a high correlation relationship among these two markets. This means that since the capital markets of these countries are in tendency to move together in the long run, an investor who makes portfolio diversification by investing in these two countries could not get expected benefits from the portfolio diversification. For that reason, investors, who want to diversify risk and increase returns by making international portfolio investment, should invest in stock markets of countries with which the country has low correlations (Akel, 2015). If securities exchanges are co-integrated in the long run, investors get the same returns from the securities with the same risks, wherever they are in the world. In this context, if there is no co-integration among capital markets, this case theoretically reflects an ideal case (Boztosun & Çelik, 2011).

Initiated from this fact, this study attempts to examine the relationship between stock market index of Turkey and stock market indices of the six European Union countries. As known, the relationship between Turkey and the European Union (EU) is a process which began in 1963 and has lasted until today with a full of uncertainty for different reasons. Despite there is an uncertainty about Turkey’s accession to the EU, EU is the largest trading partner of Turkey at the moment. In this context, understanding the interplay between stock markets of Turkey and the European Union was considered as important. The European countries used in the study were selected among the countries that represent the majority of the union economically. In order to determine the economic size of the European countries, the data obtained from European Statistical Office (Eurostat) was used.

Key Terms in this Chapter

AEX: A stock exchange index which is formed up publicly-traded Dutch companies on Euronext Amsterdam, which is formerly known as the Amsterdam Stock Exchange.

DAX: A stock exchange index which presents 30 major German companies that are traded on the Frankfurt Stock Exchange.

FTSE MIB: A stock exchange index which includes the 40 most-traded stocks on Borsa Italiana.

Granger Causality Test: A statistical test to understand whether one time series can be used to forecast another time series.

CAC 40: A stock exchange index which includes the biggest 40 multinational companies traded on Euronext Paris which is formerly known as Paris Bourse.

FTSE 100: The stock exchange index of Financial Times Stock Exchange Group which represents the share index of the 100 companies listed on London Stock Exchange with respect to highest market capitalization.

BIST 100: A main indicator to measure the performance of the 100 highest stocks that are publicly traded in Borsa Istanbul with respect to market and trading volume.

Foreign Portfolio Investment: The investments of a group of different assets from different countries’ stock exchanges.

IBEX 35: A stock exchange index which is composed of the most liquid 35 Spanish stocks that are traded in Madrid Stock Exchange General Index.

Johansen Co-integration Test: A statistical test used for understanding co-integration between several time series.

European Union: A political and economic union which is composed of 28 member states located in Europe.

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