THE IMPACTS OF INFLATION AND INFLATION UNCERTAINITY ON SECTORAL STOCK MARKET RETURNS: EVIDENCE FROM TURKEY

Year 2021, , 173 - 174, 31.12.2021

Deniz Erer

https://doi.org/10.17261/Pressacademia.2021.1526

Abstract

Purpose- The purpose of this study is to analyse the impacts of inflation and inflation uncertainity on BIST 100 and its sub-sectoral indeces
including industrial, financial, services, metarial, energy, technology, information tech, telecommunication and banks during January 2004-
Agust 2021. The first explanations about the effect of inflation on asset prices based on Fisher(1930)’s interest theory. As stated by Fisher
(1930), the expected nominal return of a financial asset should be equal the expected inflation plus expected real return. Afterwards, many
studies showed inflation and its uncertainity negatively affect asset prices. Stock prices involve information about the future values of
macroeconomic variables such as inflation. The welfare costs of inflation can emerge in case of inflation uncertainity. Hence, it is important
to research relationship between stock market returns, inflation and inflation uncertainity.
Methodology- The study employs different GARCH-type models to measure inflation uncertainity. With comparing alternative models
according to model selection criteria, EGARCH(1,1) is choosen as most appropriate model for inflation. In EGARCH model, it is assumed that
the effect of negative shocks on conditional variance is higher than positive shocks. Condional volatility obtained from this model represents
inflation uncertainity. Afterwards, nonlinear ARDL (NARDL) model is applied to analyze short-run and long-run relationship among BIST 100
and sectoral indices, inflation and inflation uncertainity. By means of this model, we can decompose effects of positive and negative shocks.
NARDL model enables to be tested linear and nonlinear cointegration relationship. This model leads to be examined short-run and long-run
effects by considering asymmetric and nonlinear components. Thanks to this model, how much of deviations from long-run equilibrium are
corrected after one period can be determined.
Findings- The analysis reveals that there are long-run cointegration relationship among stock indices returns, inflation and inflation
uncertainity. Positive and negative shocks in inflation do not have a statistically significant effect on BIST 100, services, energy and
telecommunication sectors returns in both short-run and long-run. However, positive and negative shocks in inflation statistically significantly
and negatively affect metarials and technology sectors in both short-run and long-run. A negative shock in inflation have a statistically
significant and negative effect on financial, banks and industrial sectors only in short run while on information technology sector in both
short-run and long-run. However, we do not find any evidence that inflation uncertainity affects sector returns.
Conclusion- based upon the analyisis Findings it may be concluded that central banks may provide financial stability by controlling inflation
with monetary policies implemented by them. At this point, interest rate emerges as an important monetary policy instrument. Also, the
credibility of central banks is an important factor in ensuring financial stability. Consequently, the findings from this study provide significant
information for financial investors and policy makers.

Keywords

Inflation, inflation uncertainity, stock prices, EGARCH model, NARDL model

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