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Threshold cointegration, nonlinearity, and frequency domain causality relationship between stock price and Turkish Lira

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  • Kassouri, Yacouba
  • Altıntaş, Halil

Abstract

Modelling complex asymmetric effects and non-linear relationships between exchange rate and stock prices has challenged classical econometric methods. This study contributes to the relative literature in the following distinct ways. First, we follow a variety of econometric approaches in order to characterize the complex dynamic co-movements between Turkish stock market and exchange rate from January 2003 to December 2018. Secondly, we show that the evidence for asymmetric threshold cointegration in Turkey’s financial market can be hidden by following linear time series methodologies. Thirdly, it is also worth noting that the real effective exchange rate, USD-Turkish lira exchange rates, money supply and interest rates have large predictive power for stock price fluctuations at various frequencies. Building on these insights, we claim that asymmetry (nonlinearity) is particularly important in Turkey’s financial market because it shows the need for a new pattern of policy measures to prevent financial market crisis risk in Turkey.

Suggested Citation

  • Kassouri, Yacouba & Altıntaş, Halil, 2020. "Threshold cointegration, nonlinearity, and frequency domain causality relationship between stock price and Turkish Lira," Research in International Business and Finance, Elsevier, vol. 52(C).
    • Handle: RePEc:eee:riibaf:v:52:y:2020:i:c:s0275531918309875
    DOI: 10.1016/j.ribaf.2019.101097
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    More about this item

    Keywords

    Exchange rate; Stock prices; Asymmetry; Threshold; Cointegration; Frequency domain causality;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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