Effects of macroeconomic dynamics on stock returns : case of Turkish stock exchange market

It has been widely accepted that the empirical validity of the efficient markets hypothesis significantly differ between developed and emerging markets. Macroeconomic factors are thought to play an important role in this context. Since the financial markets in developing countries can be characterized as not being deep and stable, changes in macroeconomic conditions can have important impacts on the performances of the stock exchange markets. The developments in ISE and other institutions combined with several structural breaks and financial crises surely change the dynamics of the relationship between these macroeconomic variables and ISE. Therefore, we take this discussion as our starting point and analyze the effects of several macroeconomic variables on ISE within a time-varying parameter models with GARCH specification. It is found that several financial crisis and unsuccessful stabilization attempts led to a structural break on the impact of macroeconomic developments on stock exchange performance. In the second part, we attempt to measure the stock exchange market volatility within the time varying parameter framework. The conditional variances exhibit information about the structural uncertainty in ISE. We report the series for this type of uncertainty in this section.