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Int. J. Financial Stud. 2017, 5(1), 8; doi:10.3390/ijfs5010008

Causality between Stock Prices and Exchange Rates in Turkey: Empirical Evidence from the ARDL Bounds Test and a Combined Cointegration Approach

Department of Banking and Finance, Near East University, Near East Boulevard, 99138 Nicosia, North Cyprus, Mersin 10 Turkey
Academic Editor: Nicholas Apergis
Received: 6 September 2016 / Revised: 4 February 2017 / Accepted: 10 February 2017 / Published: 1 March 2017
View Full-Text   |   Download PDF [275 KB, uploaded 1 March 2017]

Abstract

This paper investigates the interaction between stock prices and real exchange rates by applying monthly data from Turkey for the period between January 2001 and September 2016. This study uses the autoregressive distributed lag (ARDL) model and the Error Correction Model (ECM) in order to investigate the existence of a long-run equilibrium relationship between the variables. The evidence reveals that there is a strong long-run cointegration. The robustness of the ARDL bounds test cointegration was confirmed using the newly-developed combined cointegration, which also provided the same evidence for a strong long-run relationship. The Granger causality test results indicate a long-run bidirectional causality between stock prices and real exchange rates, and also a unidirectional causality from the real exchange rates to the stock prices in the short-run. In order to analyze the validity and reliability of the test results, diagnostic tests were applied in both the short-run and long-run models. View Full-Text
Keywords: real exchange rate; stock prices; ARDL bounds test; combined cointegration real exchange rate; stock prices; ARDL bounds test; combined cointegration
This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. (CC BY 4.0).

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MDPI and ACS Style

Türsoy, T. Causality between Stock Prices and Exchange Rates in Turkey: Empirical Evidence from the ARDL Bounds Test and a Combined Cointegration Approach. Int. J. Financial Stud. 2017, 5, 8.

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