The Effect of Macroeconomic Variables on Stock Markets: A Study on Istanbul Stock Exchange Indices

The objective of this study is to assist investors and decision-makers in financial markets in making more informed and strategic decisions regarding their investment choices. This will be achieved by determining the effects of macroeconomic variables on index volatilities with ARCH models. This study goes beyond merely explaining the relationship between market volatility and past volatility and error terms by utilizing the GARCH-X model to examine the impact of exogenous macroeconomic factors on volatility. The findings indicate that the volatility of BIST indices is influenced by both past shocks and macroeconomic variables. Furthermore, the results demonstrate that shocks in the markets have a persistent and long-lasting impact on volatility. The analysis of macroeconomic variables revealed that exchange rate fluctuations have the greatest impact on volatility, particularly in sectors with foreign currency-based income and expenses, borrowing in foreign currency, import-based production, and integration into international markets. Interest rates also influence volatility, with varying effects across sectors. The Producer Price Index (PPI) exerts a differential impact on volatility, with varying effects across sectors. The study encompasses solely the BIST indices and a specific temporal frame (01/01/2018-30/09/2024). Furthermore, three variables were identified as macroeconomic variables. This study provides a valuable reference for financial market actors seeking to understand the macroeconomic sensitivities of sectors.