A Study of Nonlinear Dynamics in Equity Market Index: Evidence from Turkey

The dynamics of Istanbul Stock Exchange (ISE) 100 index is explored in this study for the past 25 years. The main motivation of this paper is to find out the source and nature of any dependence in the ISE index. There is dependence in the log returns of the ISE. This dependence is not a linear dependence since no ARIMA models remove the dependence. Moreover, the dependence cannot be explained by nonlinear autoregressive process (GARCH) and important relevant macroeconomics variables. The persistence in the return dependence is not short term (3-months or less) in nature. Nonlinearity in the ISE index is caused by non-Gaussian innovations and it is not likely to be caused by chaos. Duration dependence test suggests that there is no evidence of a rational bubble in the log returns. There is some evidence of a structural break in the Turkish equity market around May 2000. However, the results do not change significantly when the same analyses are applied on the pre-and post- May 2000 periods. These results suggest that ISE 100 index is relatively efficient. Although there is dependence, the predictable component of the index is nonlinear, non-chaotic, and bubble-free. The predictable component is uncorrelated with any macro factors and cannot be explained by conditional autoregressive variance.