Do political risks matter in the financial markets?: evidence from Turkey

Abstract

Understanding political risk and its effect on financial markets is an important issue for both policymakers and investors, as capital flow tends to be confidence-based across financial markets. Using both dollar-based monthly returns from the BIST100 index and the total political risk rating, including four political risk subcomponents, for the period of January 1997 to June 2013, this paper investigates the long-term relationship between financial markets and political risk in Turkey applying cointegration tests and causality tests to data obtained from Borsa Istanbul (BIST) and the International Country Risk Guide (ICRG). Our findings indicate that, a long-term relationship of equilibrium exists between financial markets and political risks in Turkey, revealing the importance of considering political conditions when making decisions regarding financial markets in Turkey. The research is expected to contribute to the literature, especially in the context of trading in emerging financial markets and how political acts reflect financial markets, as shown by the evidence from Turkey.