The effects of macroeconomic factors on stock returns: Istanbul Stock Market

Purpose - The purpose of this paper is to investigate the performance of the arbitrage pricing theory (APT) in the Istanbul Stock Exchange (ISE) on a monthly basis, for the period January 2001 to September 2005. Design/methodology/approach - This study examines six pre-specified macroeconomic variables which are: the term structure of interest rate, unanticipated inflation, risk premium, exchange rate and money supply. All these are the same as those used by Chen, Roll and Roll for the US market. In this study, the authors develop one more variable namely unemployment rate, which has a relation with the stock return. Findings - Using the OLS technique, the authors observed that there are some differences among the market portfolios. Before starting to comment on the result of OLS, the serial correlation problem was discussed by using Durbin-Watson statistics. In this study, the critical values were ranged from between 1.33 and 1.81 (T = 57, K = 6). Our test results confirmed that in ten out of the 13 there were no serial correlations. Our results show that there are big differences among market portfolios against macroeconomic variables through the variation of R-2. In the remaining portfolios; there was no evidence to suggest. Research limitations/implications - In this paper, the authors face a problem that was no corporate bond in Turkey's market. Originality/value - This analysis appears to be the first empirical test of APT using the CAPM formula for finding the risk premium point for ISE.