The effects of the inflation targeting regime on the İstanbul stock exchange

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2009

Author

Bölükbaşı, Firuze

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The primary purpose of this study is to test the effects of inflation targeting in Turkey in terms of providing stability in the financial system by lowering the volatility in the Turkish stock market. Although there are many factors other than monetary policy which can affect stock market volatility, this study examines whether the volatility due to monetary policy can be reduced by increasing the accuracy of investors’ expectations about the central bank’s future actions. In the first part, a “Volatility Analysis” is conducted for three sub-periods including the pre- and post-periods of the implementation of inflation targeting in order to see whether the volatility in the Istanbul Stock Exchange changed over time. Second, an “Announcement Effect Analysis” is carried out by using the central bank’s interest rate and inflation rate announcement dates in order to evaluate how investors’ expectations react to a change in these rates during period from 2002 to 2007. Finally, a “Combined Analysis” is done in order to examine the relationship between the returns in the Turkish stock market and the surprise caused by the realized interest and inflation rates being different from their expected values. The empirical findings about the level of volatility indicate that there is a decline in volatility of the Istanbul Stock Exchange returns when volatility is compared on a pre- and post-policy period basis. Also, it is found that the announcement effect was present, meaning interest rate announcements generally came as a surprise to stock market participants. However, this announcement effect has a notably decreasing trend from 2002 to 2007 which is another evidence of the inflation targeting regime’s success at reducing stock market volatility. Finally, the “combined analysis” shows that CBT’s power to effect stock returns and to direct investors’ expectations increases from 2002 to 2007.

Subject Keywords

Business administration.

URI

http://etd.lib.metu.edu.tr/upload/12610464/index.pdf
https://hdl.handle.net/11511/18464

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Graduate School of Social Sciences, Thesis

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Citation Formats

F. Bölükbaşı, “The effects of the inflation targeting regime on the İstanbul stock exchange,” M.B.A. - Master of Business Administration, Middle East Technical University, 2009.