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Stock and bond market interactions with two regime shifts: evidence from Turkey

Pinar Evrim-Mandaci, Hakan Kahyaoglu and Efe Cagli ()

Applied Financial Economics, 2011, vol. 21, issue 18, 1355-1368

Abstract: This study aims to examine the relationship between the stock market and the government bond market in Turkey over a period from May 2001 to August 2009 in order to find out whether specific asset allocation in these markets provides benefits. This article employs several cointegration techniques such as Engle and Granger (EG, 1987), Gregory and Hansen (GH, 1996) and Hatemi-J (HJ, 2008). Furthermore, it applies the long run elasticities of Stock and Watson (1993) and parameter stability tests of Hansen (1992) and Andrews (1993). According to the results of EG and GH tests, the government bond index is not cointegrated with any other stock market indices. In contrast to the previous tests, we find a relationship which indicates low benefits of asset allocation between some stock indices and the government bond index when we employ the HJ method which takes two structural breaks into consideration. When we use the long run elasticities based on Ordinary Least Squares (OLS) and Dynamic OLS (DOLS) procedures, we find that the government bond index has a significant effect on some stock indices. In addition, employing the stability test of Hansen (1992), we find that the results of cointegration test with structural breaks (HJ) are consistent. Finally, we use Quandt-Andrews (Andrews, 1993) test and investigate possible break points in the relationship between price indices.

Keywords: cointegration; structural change; regime shift; asset allocation (search for similar items in EconPapers)
Date: 2011
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DOI: 10.1080/09603107.2011.572847

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