How Does Stock Market Volatility Affect Business Cycles? Asymmetric Evidence From Türkiye

Abstract

This study aims to investigate how stock market volatility affects business cycles in Turkey for the quarterly period 1998-2022. Borsa Istanbul 100 index return series (RBIST) and detrended real Gross Domestic Product (BC) are employed to proxy stock market volatility and business cycles, respectively. Asymmetric methods are used to decompose the effects of this volatility in the expansion and contraction phases of business cycles. First, business cycles are examined under the expansion and contraction regimes by the Markov regime-switching GARCH (MS-GARCH) method. According to the findings of the MS-GARCH method, RBIST negatively affects BC in both phases. However, this effect is relatively greater during contraction phases such as the Banking Crisis in the early 2000s, the Global Financial Crisis, the 2016 and 2018 Currency Crises, and the recent Covid-19 Pandemic. Second, the non-linear ARDL (NARDL) method is applied to robust the findings. The findings of the NARDL method in the short run corroborate the findings obtained from the MSGARCH method. The positive and negative components of RBIST have a negative effect on BC in the short run, but it is positive and symmetric in the long run. Overall, the findings of the study suggest that policymakers should consider the non-linear characteristics of the relationship between stock market volatility and business cycles.