The causal relationship between stock prices and macroeconomic variables: A case study for Turkey

Abstract

This study examines the causal relationships between stock prices and macroeconomic variables in Turkey, by applying the techniques of the long-run Granger non-causality test recently proposed by Toda and Yamamoto (1995). We test the causal relationships between the ISE-100 Index (Istanbul Stock Exchange- 100) and the five macroeconomic variables: foreign exchange rate, gold price, broad money supply, industrial production index and consumer price index using monthly data for the period March 2001 to June 2010. The results suggest that there is a unidirectional long-run causality from stock price to macro variables for Turkey. This implies that the stock market can be used as a leading indicator for future growth in foreign exchange rate, gold price, money supply, index of industrial production and rate of inflation in Turkey.