Linear and nonlinear cointegration relationship between stock prices and exchange rates in Turkey

The aim of this study is to analyze both the linear and nonlinear co-integration relationship between Euro and U.S. Dollar exchange rates and stock price index with monthly time-series data covering the time period 1980 - 2013 for Turkish Economy. Linear co-integration test is analyzed by the bound test approach, developed by Pesaran, Shin and Smith (2001), that does not need to be applied to the series that are stationary at the same level. Whereas, nonlinear co- integration analysis is investigated by Breitung (2001) rank test. Additionaly, because series has a structural break in trend in February 2001, analyzes are also employed for sub-periods. The empirical findings suggest there is a co-integration relationship between exchange rates and stock price index in the long run. This relationship is positive in long run and negative in short run. The direction of the relationship is from exchange rates to stock prices. Therefore, for Turkish Economy the "traditional approach describing the relationship between stock prices and exchange rates is valid.