The impact of external sovereign debt and the transmission effect of the US interest rate on Turkey’s equity market

ABSTRACT

The main objective of this study is to examine the dynamic impacts of external sovereign debt and the transmission effect of the US interest rate on Turkey’s equity market. Autoregressive Distributed Lag (ARDL) model is used to test the long-run coefficients between the variables. Gregory-Hansen with one structural break (SB), Hatemi-J cointegration tests with two (SB), and the recently developed Bayer-Hanck (BH) combined co-integration tests are used to confirm robustness of the ARDL bounds test. Moreover, the Granger causality test is applied to examine the causality direction among the variables. The results showed empirical evidence that the Turkish equity market was negatively affected by the external sovereign debt. Furthermore, the results provided a strong evidence of the spillover effects of the US interest rate on Turkey’ equity market through the local interest rate and external sovereign debt channels. These findings suggest that the Turkish policy makers are required to design plans to avoid any undesirable impacts of the spillover effects of the external debt and foreign interest rates policies on equity market in order to maintain stability.

KEYWORDS:

• The external sovereign debt
• the US interest rate
• ARDL
• Bayer-Hanck combined co-integration test

JEL CLASSIFICATIONS:

• C
• G
• G3
• G38

Acknowledgments

We would like to thank the editor and the anonymous referee for their valuable comments, which helped us to improve the paper. However, any remaining errors are solely ours.

Disclosure statement

No potential conflict of interest was reported by the authors.

ORCID

Aliya Zhakanova Isiksal http://orcid.org/0000-0001-8303-9792