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Analysis of the Relationship between Real Effective Exchange Rate, Common Equity Tier 1 Ratio and Return on Equity: Evidence from Turkey

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  • Esra N. Kılcı
  • Burcu Kıran Baygın

Abstract

The analysis of the relationship between exchange rate fluctuations, common equity and return on equity is of high importance to be able to improve adequate policies with the purpose of maintaining stability in foreign exchange rate, when it is taken into consideration that mentioned fluctuations lead to the loss in bank capital and profitability. Hence, the studies in the related literature have been increasing in great amount recently. The objective of this study is to investigate the relationship between real effective exchange rate, common equity and return on equity in the period of 2014:01 - 2018:09. The unit root properties of the series are tested by using Carrion-i Silvestre et al.(2009) unit root test and the cointegration relationship between the series is investigated by employing Maki(2012) cointegration test. Both tests take into account multiple structural breaks. The results indicate that there is only a long run relationship between real effective exchange rate and return on equity for Turkish Banking Sector with structural breaks.

Suggested Citation

  • Esra N. Kılcı & Burcu Kıran Baygın, 2019. "Analysis of the Relationship between Real Effective Exchange Rate, Common Equity Tier 1 Ratio and Return on Equity: Evidence from Turkey," Alphanumeric Journal, Bahadir Fatih Yildirim, vol. 7(2), pages 319-332, December.
    • Handle: RePEc:anm:alpnmr:v:7:y:2019:i:2:p:319-332
    DOI: http://dx.doi.org/10.17093/alphanumeric.521848
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    More about this item

    Keywords

    Common Equity; Real Effective Exchange Rate; Return on Equity; Structural Breaks; Turkish Banking Sector;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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