Investors’ Selection Between Two Financial Markets: A Conditional Correlation Approach

Oral Erdoğan and Harald Schmidbauer

Istanbul Stock Exchange Review, 2006, vol. 8, issue 30, 1-18

Abstract: This study focuses on a certain aspect of substitution effect between FX and stock market investments. The motivation for this approach is that a forecast of future correlations and volatilities is the basis for pricing models, according to Engle (2002). Forecasts are obtained via a methodology based on a bivariate GARCH model. For illustration, we choose the Turkish market, since the two markets, the FX and the stock markets, are perceived as alternative investment opportunities by Turkish investors. Our conclusion is that investors should be aware of the degree of substitution, and hence of risk spillovers, at the time of their investment.

Date: 2006
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