Investigating the Effects of Selected Macroeconomic Variables on Istanbul Stock Exchange Return by Applying Markov Regime Switching Model

This paper investigates the effects of selected macroeconomic variables on Istanbul Stock Exchange (ISE) Return. We explore the relationship among the ISE return, crude oil price, inflation rate and exchange rate via employing monthly data from 2000-04-01 until 2017-12-01 in Turkey. Based on the Markov Regime Switching model, we find that ISE return is divided into two regimes. The results indicate that stock return lags have a positive effect on the stock market itself; and only the second lag in regime 1 is significant. Moreover, the results show that the positive effects of crude oil price and negative effects of inflation rate in regime 0 (low-return regime) are meaningful, while exchange rate is meaningful just in regime 1 (high-return regime), which lead to reductions in stock market return. Furthermore, probability matrix indicates that the probability of stability in regime 0 is more than that of regime 1. Overall, the findings are important to investors and policymakers to pay more attention on crude oil price and inflation rate due to the probability of stability in regime 0 is more.