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Interdependence and Volatility Spillovers Under Market Liberalization: The Case of Istanbul Stock Exchange


  • Ali F. Darrat,

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  • Omar M. Benkato

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    • *

      The authors are respectively from the Department of Economics and Finance, Louisiana Tech University; and the Department of Finance, Ball State University. They benefitted from helpful comments from participants at the 2000 International Conference of the Economic Research Forum held in Amman, Jordan. Comments from an anonymous referee greatly improved the paper. (Paper received January 2002, revised and accepted July 2002)

†Ali F. Darrat, Department of Economics and Finance, College of Administration and Business, Louisiana Tech University, Ruston, Louisiana 71272, USA.


This paper analyzes stock returns and volatility relations between the Istanbul Stock Exchange (ISE) and the global market as represented by stock markets in the US, the UK, Japan and Germany. Results from monthly data and multivariate cointegration tests suggest that the ISE became significantly integrated in the global market only in the period following market liberalization in late 1989. We also find evidence based on GARCH estimations that capital liberalization actually mitigated, rather than intensified, volatility in the ISE. Our results further suggest that the Asian crisis in mid-1997 and the consequent Russian economic meltdown in mid-1998 are partly responsible for the recent excessive volatility in the Turkish market. The results also identify the US and the UK markets as dominate sources of volatility spillovers for the ISE, even in the period following the Asian-Russian crises. Consequently, it appears that the two matured markets of the US and the UK shoulder significant responsibility for the stability and financial health of smaller emerging markets like the ISE.