Effects of Interest and Exchange Rate on Volatility and Return of Sector Price Indices at Istanbul Stock Exchange

Abstract

This paper investigates the impact of interest rate and exchange rate on the composite and sector price indices, which are financial, industrial, services and technology in Istanbul Stock Exchange. Examining sector indices for investment purposes makes it essential to understand how various sectors behave over time especially following changes in exchange rate and interest rate. This article uses daily sector data over the 2001-2008 period and Generalized Autoregressive Conditional Heteroscedasticity (GARCH) models are employed in investigating the volatility and return behavior of indices. Analyzing the sources of volatility in the selected indices is crucial for implications regarding asset pricing, risk management, and portfolio selection. © EuroJournals, Inc. 2008.