The Volatility Transmissions Between the Stock Exchange Indices in Turkey and the Major Financial Centers

Volatility Transmissions between the stock exchanges is an important issue for the investors because if they want to decrease the volatility of their portfolios on a global scale, they have to be able to find stock exchanges which do not co-move so strongly and positively. That is a simple result of the modern portfolio theory known as the diversification. A well diversified portfolio should include assets that are not perfectly positively correlated with each other. In the link below is one of the latest papers of mine in which I questioned the volatility transmissions between the leading stock exchange indices in Turkey and the major financial centers. Since it is a very short paper, i am not telling the conclusions upfront... See it yourself at

Chile swings left (From FT European Edition, Nov.2013)

"It is not because the economy has done badly under the out-going centre-right government of Sebastián Piñera. Unemployment is at record lows, poverty has continued to fall and productivity has risen after years of decline. Nor, in a sign of Chile's institutional maturity, has the political shift been accompanied by the hysteria that so often accompanied opposition wins in Latin American politics. Rather, it reflects a widespread desire in Chile for greater social equality amid the economic boom. That is quite understandable given that Chile is the most unequal member of the OECD."

Who is Afraid of Tapering?

Who is afraid of tapering is the question Morgan Stanley economists asked recently in a research report they published. To give an answer, I may say I am!The report can be accessed from Morgan Stanley's research page (though you have to log in). For those of you who have not rights to see the full report, I provide the Morgan Stanley's introduction dated September 13th 2013 of the report below.

"All eyes on the Fed: The prospects of the beginning of Fed tapering will most likely be the centre of attention for markets next week. The gradual removal of monetary stimulus and tighter external funding conditions will pose a threat to those CEEMEA countries which have thus far benefitted from easy access to funding. This week’s current account releases in South Africa and Turkey acted as a reminder of how serious these challenges still are. Meanwhile, on the policy front, central banks like the CBT in Turkey have maintained their unorthodox stance, and others like the NBH in Hungary are also getting more creative, with this week’s announcement of a big increase (6.5% of GDP) in its FGS initiative to push loans into the SME sector. In a similar creative vein, in Russia, where bank demand for CBR financing is growing and conventional collateral is limited, the CBR announced the next auction on October 14, at which it will provide financing of up to RUB 500 billion (US$15 billion) against bank loans. 
Next week, we have three monetary policy meetings in Turkey, South Africa and Ghana. We do not expect any policy rate changes.The timing of the CBT meeting in Turkey (one day ahead of the Fed) likely means that the bank will hold steady and, if anything, it may choose to implement a change in the RRR rates or the ROC on FX deposits after it has seen the outcome of the Fed meeting.This can happen at any time by board approval and independent of the MPC. In South Africa, we believe that the current weak growth environment will make it difficult for the SARB to begin a policy normalisation exercise any time soon. 
In terms of upcoming data, we expect the South Africa August CPI print to come in at 6.4%Y on September 18, and July retail trade to be published on the same day to accelerate from 1.9%Y to 5.5%Y. In Poland, we expect the August IP (Wednesday) and labour market data (Tuesday) to be distorted by working days (especially output). While the headline prints could surprise on the downside, we would encourage investors to focus on the workday-adjusted series, which in our opinion is likely to continue to improve. On the policy front, we are likely to hear more about some Polish pension reform details (no set date). And in Hungary, we may get some interesting headlines around the beginning of next week on the subject of FX mortgage relief, following the Banking Association’s meeting on Monday. In Russia, we expect this week’s data release to show signs of the 2H pick-up, including a rise in IP to 0.3%Y growth, helped by the better harvest."

International Capital and Growth Nexus in Turkey

In the figure above, I report the cumulative distribution functions of GDP growth in Turkey and the Capital Inflows to Turkey. So similar, no?

In a recent article, I and Ahmet Yilmaz of Marmara University have shown that the GDP growth in Turkey is highly dependent on the international capital. "OK", you may say, "Highly"... But what does "Highly" mean in this context?

Well, we first gathered detailed data for the capital inflows to Turkey from 1991 (this is the first date we could reach detailed quarterly data. Besides Turkey completely removed the capital account controls in August 1989) to Q3 2012. In the capital inflows, we included net errors and omission figures as well since net errors and omission numbers can be very (I mean very) high for countries like Turkey where substantially large amount of unregistered cross border trading activity exists.

And we formally compared the capital inflows data with the quarterly GDP growth data (YoY). The result is capital inflows Granger cause growth in Turkey but reverse causation does not hold! Plus, 44% of the variation in Growth can be attributable to the shocks to the capital inflows to Turkey!!

In a second paper, I am currently writing with Hasan Selcuk of Marmara University again, we have found that there exist nonlinear volatility interactions between the capital inflows and growth as well. Volatility is spilling over from capital inflows to growth in Turkey according to the Dynamic Conditional Correlation GARCH model we adopted in the paper with Hasan Selcuk.

In sum, what we have at hand is as follows:

- GDP growth in Turkey is dependent on capital inflows from abroad. Capital inflows cause growth but not the other way round.
- And there are volatility interactions between the two. Volatility spills over from capital inflows to growth. But not the other way round.

Can Volatility Predict Stock Returns?

I asked the question in the title in a paper that I deposited at the SSRN elibrary today.

The reverse question, i.e. whether the current stock returns are good predictors of future volatility, has been asked and studied many times in the literature. 

However, the causality from current volatility to future stock returns did not attract the academic attention at the same rate (that is not to say this way of causation has never been studied. I am only saying this way of causality is much less questioned.)

This is interesting because, although the academic community does not pay too much attention to whether volatility predicts stock returns or not, investment community (aka market professionals) seem to believe that the VIX index (a volatility index) is a gauge for future movements of S&P500 (a stock exchange index). 

Well, long story short what I did in this paper is I constructed a near-VAR system which allowed me to model the dynamic interdependencies between the variables (variables are the changes in the VIX implied volatility index - that is the volatility - and S&P500 returns - that is the stock returns).

Then I estimated the model and found that volatility (at least the implied volatility measure I used) could not predict the relevant stock exchange returns. Yikes!

See this paper on SSRN:


here is my bio for those interested:

Current Positions

- Assistant Professor of Economics at Marmara University in Istanbul Turkey,

-  Country Risk Analyst (Turkey Expert), Euromoney Country Risk Ratings 

- Member of the academic advisory board for the finance and banking sectors in a project supported by the Presidency of Turkey, namely 'Turkey's Strategic Vision for 2023 Project' (Btw, 2023 will mark the 100th year of the Modern Turkey's birth),

- Contributor to TASAM, a think-tank located in Istanbul doing research on international and economic affairs of Turkey

- Suffolk University in Boston USA (PhD in Economics)
- HEC School of Management in Paris France (MBA with Finance concentration
- BA and MA degrees in Economics from Bogazici University in Istanbul Turkey

Professional Experience 
- Portfolio Analyst at ABN AMRO Asset Management
- Economist at TASAM (a Turkish think-tank)
- Economist at Is Bankasi (largest private bank in Turkey)
- Researcher at The Beacon Hill Institute (a public policy center in Boston)...

Plus, I taught and/or teach 'Business Statistics' and 'Microeconomics' courses at undergrad and grad levels. 


[1] Söylemez, Arif Orçun (2013), “Exchange Rate Misalignment in Turkey: Overvaluation of the Turkish Lira”, International Journal of Academic Research in Business and Social Sciences, Vol. 3(4), pp.198-206.

[2] Söylemez, Arif Orçun and Server Demirci (2013), “The Nonlinear Causality between the International Capital Flows and Economic Growth in Turkey”, Journal of Financial Researches and Studies, Vol. 4(8), pp.99-110.

[3] Söylemez, Arif Orçun (2013), “Productivity Differences and Current Account Imbalances in the Euro Area”, Journal of Financial Researches and Studies, Vol. 4(8), pp.87-98.

[4] Söylemez, Arif Orçun and Ahmet Yılmaz (2012), “The Relationship Between the International Capital Flows and Economic Growth after the Financial Liberalization  in Turkey”, Journal of Economic and Management Sciences, Vol. 33(2), pp.47-66

[5] Tuerck, David G., Çağdaş Şirin and Arif Orçun Söylemez. State Competitiveness Report 2006. Beacon Hill Institute, Boston USA, 2006.

[6] Söylemez, Arif Orçun (2004), “Non-Economic Determinants of Economic Growth” Strategic Foresight, Vol. 2. pp.98-103.

[7] Söylemez, Arif Orçun (2004), “Discussions on International Finance and Financial Liberalization Experience of Turkey” Strategic Foresight, Vol 1. pp.24-33.

[8] Söylemez, Arif Orçun and Server Demirci (2013), “Volatility Spillovers from the International Capital Inflows to Turkish Economic Growth”,  forthcoming in Eurasian Journal of Business and Economics.

[9] Söylemez, Arif Orçun (2013), “A Survey on the Control of International Capital Flows and the European Union’s Perspective on the Issue”, forthcoming in Marmara Journal of European Studies.

Other Stuff
- Institute for Humane Studies (IHS) alumni, IHS is an institute dedicated to spreading the classical liberal ideals... 
- Recepient of the 'Dan Searle Fellowship' of the IHS and Dan Searle Foundation at Washington DC in the year 2009...

- Member of American Finance Association (AFA) 
Omicron Delta Epsilon International Economics Honor Society...