THE EFFECT OF EXCHANGE RATE ON BORSA ISTANBUL INDUSTRİAL INDEX: EVİDENCE FROM COİNTEGRATİON TESTS WİTH DİFFERENT APPROACHES TO MODEL STRUCTURAL BREAKS

Abstract

This paper aims to analyze the possible relationship between BIST Industrial Index and currency exchange rate by various cointegration tests using different approaches in modelling structural break(s), covering 2005:01-2019:12. The stationarity of series are tested by ADF (1979; 1981) unit root test, Narayan and Popp (2010) unit root test, and Fourier unit root test proposed by Enders and Lee (2012). Besides, the cointegration relationship between the series is tested by ARDL bound test, Hatemi-J (2008) cointegration test with two structural breaks and Fourier cointegration test introduced by Tsong et al. (2016). ARDL and Hatemi-J (2008) test results show that there is no long-run pattern of cointegration between BIST Industrial Index and currency exchange rate. However, results of Fourier cointegration test that yields efficient findings irrespective of the number and the form of breaks conclude the existence of cointegration relationship between the variables. Finally, long-run coefficient estimated by Stock and Watson (1993)’s DOLS methodology posits that currency exchange rate has statistically significant and negative effect on BIST Industrial Index.