xSitki

Foreign Influence in Turkish Stock Market

Synopsis

Relatively higher return expectations, tax exempt environment, low correlation with the returns in developed markets, and the ongoing European accession process have attracted non-domestic funds to the ISE recently. In this period, it is seen that foreign inflows have broadened the investor base and have affected security prices. The price impact of a 1 % increase in the share of foreign funds according to the market capitalization, results in an increase of 2.77 % – 3.57 % in the returns of the ISE 30. Foreign inflows have significant influence on the ISE even after controlling for the omitted variables used in this thesis. It has also been determined that non-domestic funds chase returns and engage in positive feedback trading when they invest in the ISE. The scope of this book is the effects of foreign order flow and resulting change in the liquidity levels, on stock returns. Even though there are numerous studies about the effects of order flow on stock prices and the relationship between liquidity and stock prices have also been studied widely in the literature, the impact of foreign participation on a market is relatively undermined in the literature. One of the reasons may be the fact that the differentiation of order flows as domestic flows and foreign flows became popular in the last two decades when foreign investors increased their significance and dominance in these markets. Developing Information Technology and pervasiveness of internet enabled funds to flow in and out of countries and consequently, researchers aimed to assess whether foreign funds are detrimental or not to the markets they study. Moreover, the existing studies that examine the effects of order flows mostly cover the developed markets where foreign funds are usually a minority but ISE is heavily dominated by foreign funds, the participation rate of foreigners equal to % 66.55 as of 20-11 2009 and this market may give out promising outcomes as it is an emerging market that doesn’t have much prominence in the related literature.

Introduction

Literature Review

1.1. Base Broadening Hypothesis

1.2. Price Pressure Hypothesis

1.2.1. Price Reversals

1.2.2. Market Overreaction

1.2.3. Measurement of Returns Arising from the Price Reversals

1.3. Feedback Hypothesis

1.4. Omitted Variables

1.5. Hypothesis

1.6. Liquidity and Stock Return

1.7. Commonality and Systematic Liquidity

1.8. Liquidity Risk Factors

1.8.1. The Pastor and Stambaugh Factor (P&S)

1.8.2. Illiquidity Factor

1.8.3. The bid-ask Spread Return Factor (HLS)

1.9. Trade Imbalances

Factors Affecting Stock Prices and Related Theories

2.1. Capital Structure

2.1.1. Capital Structure Theory

2.1.2. Tax Effect

2.1.3. Bankruptcy Costs Effect

2.1.4. Trade off Theory

2.1.5. Signaling Theory

2.2. Dividends

2.2.1. The Dividend Irrelevance Theory

2.2.2. The Bird-in-the-Hand-Theory

2.2.3. The Tax Preference Theory

2.2.4. Clientele Effect

2.3. Psychological Factors

2.4. State of the Economy

2.5. Level of Interest Rates

2.6. Market Risk

2.6.1. Efficient Capital Markets

2.6.2. Efficient Market Hypothesis

2.7. Liquidity

2.8. Foreign marketing Returns

2.9. Other Factors

Foreign Trades and Foreign Investors

3.1. Rebalancing Need of Institutional Portfolios

3.2. Dynamic Rebalancing Strategies versus Buy and Hold Strategy

3.2.1. Buy and Hold Strategy

3.2.2. Constant Mix Strategy

3.2.3. Constant Proportion Strategy (CPPI)

3.3. Comparison of Strategies

3.4. Presence and Participation of Non-Domestic Funds in Futures Contracts of ISE

3.5. Structure of Foreign Investors in ISE

Data and Methodology

4.1. Preliminary Analysis

4.1.1. Unit Root Test and Covariance Stationary

4.1.2. Causality Analysis

4.2. Methodology

4.2.1. The Base Broadening Hypothesis

4.2.2. The Price Pressure Hypothesis

4.2.3. The Omitted Variables Hypothesis

4.2.4. The Feedback Hypothesis

Test results and Inferences from the Outcomes

5.1. Interpretation of Test Results

5.1.1. Testing of Base Broadening Hypothesis

5.1.2. Testing of Price Pressure Hypothesis

5.1.3. Testing of Omitted Variables Hypothesis

5.1.4. Testing of Feedback Hypothesis

5.2. Interpretation of Test Results of Each Hypothesis by Excluding the Global Crisis of 2008 from the Sample Period

Conclusion

References

About Author

Dr. Sonmezer graduated with a B.A. degree in Sociology from Bogazici University; a MBA degree from Istanbul Bilgi University. he obtained his Ph.D. in Accounting and finance from Marmara University. He has worked at local and international companies throughout his career. He was employed in Dogus University from 2008-2010. he works as an assistant professor at Beykent University since 2011. Risk management, Financial Management, Quantitative methods, Managerial Accounting are some of the courses he instructs. He is a member of AIMR and Eurasian Economist Association and he has one daughter and one son.