Effects of the domestic and ECB interest rates on Türkiye's stock market: Empirical evidence from a newly developed combined co-integration and causality analysis

The research examines the influence of the domestic interest rate and spillover effect of the European Central Bank (ECB) interest rates on Turkiye's stock market from January 1999 to January 2019. The research applied the Autoregressive Distributed Lag (ARDL) co-integration method to analyze the interaction among the tested variables. The Fully Modified-Ordinary Least Square (FMOLS), and Canonical Co-integrating Regression (CCR) tests are employed to support the findings of the ARDL model. A newly developed combined co-integration approach as proposed by Bayer-Hanck (BH) is utilized to promote the ARDL co-integration method. Furthermore, the Granger Causality approach is utilized to explore the causal linkage among tested variables. The findings indicated that Turkiye's stock market was negatively affected by the domestic interest rate volatility. Moreover, the study found that Turkiye's stock market was negatively affected by the ECB interest rate policy. The research suggested that the economic ties and integration among Turkey and the European Union (EU) countries led to increasing the sensitivity and volatility of Turkiye's stock market to ECB interest rate policy. It is suggested that the monetary authorities of Turkiye should pay more attention to stock market stability through monetary policy channels. Furthermore, they should pay more attention to the effects of external shocks such as ECB policy to maintain market stability.