An Analysis of geographic and sectoral diversification using city and sector indices of Turkey

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2015
Ayan, Hamdi
This thesis examines the potentials of geographic and sectoral diversification in Turkey. A Causality in variance test suggested by Hafner and Herwartz is conducted in a pairwise fashion among city indices and among sector indices, separately, to explore the existence of diversification potential. All data are 5-day week daily time series and sourced from Borsa Istanbul. City index data covers the period January 2, 2009 between November 24, 2014, whereas sectoral index data covers the period April 1, 2004 and December 12, 2014. Empirical results show that there is no risk spillover across city and sector indices, which suggets that sectoral and geographic diversification is both beneficial for minimizing the risk. In order to compare the effects of geographic and sectoral diversification, risks of minimum variance portfolios are calculated. To see the effect of geographic and sectoral concentration on risk, Herfindahl–Hirschman Index (HHI) concentration ratios and diversifibale risks are compared. Similar to the previous findings in the literature, the results of HHI ratios and risks of minimum variance portfolios indicate that both diversification strategies are beneficial in reducing risk but geographic diversification is superior to sectoral diversification in Turkey based on the index returns.