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Analysis of Extreme Dependence Between Istanbul Stock Exchange and Oil Returns

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  • Gozde Unal
  • Derya Korman

Abstract

In this study, the relationship between oil price movements and Turkish stock market is investigated. Given the fact that Turkey is an emerging and oil dependent country, we analyze how the stock market behaves together with the fluctuations in oil prices. The study focuses on extreme observations and uses bivariate extreme value methodology in order to analyze the dependence structure between oil and stock market (ISE100). The residuals of autoregressive integrated moving average (ARIMA) models of stock market index and Brent oil returns are examined by using bivariate extreme value analysis over the period between 1988 and 2011. The overall period studied is analyzed by subdividing the period into two phases. We observe a higher dependence in the second phase (2000-2011), compared to the first phase (1988-1999). Our results show that in the second phase the extremes on the negative tails coincide more commonly compared to the extremes on the positive tails, which is in line with the current literature findings. Our findings suggest diversification opportunities for portfolio managers, as extreme observations in Turkish stock market and oil are asymptotically independent.

Suggested Citation

  • Gozde Unal & Derya Korman, 2012. "Analysis of Extreme Dependence Between Istanbul Stock Exchange and Oil Returns," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 6(4), pages 113-124.
    • Handle: RePEc:ibf:ijbfre:v:6:y:2012:i:4:p:113-124
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    More about this item

    Keywords

    Bivariate EVT; Stock Market Returns; Oil Prices; ISE;
    All these keywords.

    JEL classification:

    • C46 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Specific Distributions
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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