Portfolio Investments and Asset Prices Relationship in Turkey

This study aims to investigate the linkage between portfolio investments and asset prices in Turkey for the period of September 2008-December 2013. The accommodative policies implemented in advanced economies in order to cope with the global crisis and fragilities in the global financial system have led to considerable volatility in capital flows. Capital flows towards emerging economies have been volatile, particularly to those with large external financing needs such as Turkey. This situation has created risk of macroeconomic and financial instability in these economies. Accordingly, this paper examines the effects of portfolio investments on the main financial assets such as equity market, exchange rate and interest rates in Turkey. Toda and Yamamoto (1995) method and generalized impulse response analysis have been utilized in this study. It is found that portfolio investments have a considerable and steady impact on the exchange rate. However, severe impacts of portfolio flows are not observed on the stock market and interest rates in the long run.