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Effect of the Political Risk on Capital Asset Valuation in Financial Markets: The Case of Turkey

Author

Listed:
  • Toraman, Cengiz

    (Izmir Democracy University)

  • Tuncay, Merve

    (Cumhuriyet University)

Abstract

Recent political events and the subsequent movements in financial markets both in the developing and the developed countries raise the instincts regarding the interaction of political risks and financial markets and increase the importance of understanding the behavior of financial markets against political risks. Therefore the purpose of this study is to explain the impact of political risks on the returns of securities traded on capital markets in Turkey in the framework of Capital Asset Pricing Model (CAPM). The relation between the monthly returns of 47 companies’ assets being traded on Borsa Istanbul and the political risks in Turkey between the years of 1997 and 2013 is examined in the study. Results of the analysis held by two-step regression method represent that there exists a positive and linear relation between beta and expected return. On the other hand, it is found that 4 out of 12 political risk factors, in other words internal conflict, external conflict, government stability and military in politics have a significant impact on expected return. Contrary to the other three risk factors, only the risk of government stability is found to be positively affecting asset returns.

Suggested Citation

  • Toraman, Cengiz & Tuncay, Merve, 2017. "Effect of the Political Risk on Capital Asset Valuation in Financial Markets: The Case of Turkey," Business and Economics Research Journal, Uludag University, Faculty of Economics and Administrative Sciences, vol. 8(3), pages 413-432, July.
    • Handle: RePEc:ris:buecrj:0280
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    More about this item

    Keywords

    Political Risk; Borsa Istanbul; Capital Asset Pricing Model; Financial Markets;
    All these keywords.

    JEL classification:

    • C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models
    • 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
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • P48 - Political Economy and Comparative Economic Systems - - Other Economic Systems - - - Legal Institutions; Property Rights; Natural Resources; Energy; Environment; Regional Studies

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