Factors Affecting the Money Invested in Turkish Capital Markets by Foreign Investors

Erkam KIVRAK
29.11.2012

List of Tables and Graphs

Table 1. Regression of the Economic Mode Table 2. Coefficient of the Economic Model Table 3. Unit Root Test Graph1. Residual Normality TEST

Introduction For this study I have tried to test an economic model that states that, the EUR/TRY parity, USD/TRY parity and the Turkish government debt securities prices will have a positive impact on the money invested in Turkish capital markets by foreign investors. Assumption I strongly believe that as the parity rates go up, there will be a decrease in the value of the Turkish Lira, which means that the foreign investor will be able to invest more in the capital markets with the same amount of money they had used before. This may eventually lead to an increase in the proportion of foreign investors investing in Turkish capital markets. As for the Turkish government debt security prices, we know for fact that; when the price of a government bond increases, the interest rates will go down, causing investors to find investments that have better returns than the decreased interest rates. Therefore; the investors that had initially invested in the government debt security instruments will eventually shift over to the Turkish capital markets to seek a greater return. This will also lead to an increase in the proportion of foreign investors in the Turkish capital markets. Methodology and Testing To test this, I have used many tools that I hoped will help me better understand this relationship. Some of these tests include t-tests and F-tests. First, I tried to model this relationship. I chose the money invested into Turkish capital markets by foreign

investors as the dependent value (regressand). As my independent values (repressors) I chose EUR/TRY, EUR/USD and DIBS (Turkish government debt securities). If formulated, the following will be my economic model; Foreign Investment (TRY)= the model Now that I have formulated my economic model, it is time to data mine to find the relevant data sets. I was lucky to find all my data from a single source. I have checked the website of the Central Bank of Turkey and found all relevant information on their provided database. After getting all my datasets, it is to run the multiple regression model. I have used SPSS an EViews Statistics packages for this study. Table 1. Regression of the Economic Mode
Dependent Variable: FOREIGNINVESTMENT Method: Least Squares Date: 11/29/12 Time: 15:52 Sample: 5/28/2012 11/27/2012 Included observations: 126 Variable C DIBS USDTRY EURTRY R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood F-statistic Prob(F-statistic) Coefficient Std. Error 7.40E+11 -7.60E+08 -4.05E+11 7.93E+10 0.622805 0.613530 5.53E+09 3.72E+21 -3003.256 67.14665 0.000000 1.11E+11 7.45E+08 3.40E+10 1.13E+10 t-Statistic 6.681821 -1.019718 -11.91330 7.021037 Prob. 0.0000 0.3099 0.0000 0.0000 1.12E+11 8.89E+09 47.73422 47.82426 47.77080 0.303294

DIBS +

USD/TRY +

EUR/TRY + Residual of

Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion Hannan-Quinn criter. Durbin-Watson stat

As shown in the output of the economic model, besides running the regression of the model, many other statistical tests have been conducted such as the t-Statistic and the F-Statistic ( ANOVA). According to the result of the regression of the model, we see that all of our parameters are significant at the level %5 except for the DIBS which is %31. The RSquare measures the proportion of the variation in the dependent variable (Foreign Investment) that was explained by variation in the independent variables. In our case, the R-Square tells us that %62 of the variation was explained. The Adjusted R-Square measures the proportion of the variance in the dependent variable (Foreign Investment) that was explained by variation in the independent variables. In our case, the Adjusted R-Square shows that %61 of the variance was explained.The standard error of the regression model is used to measure the standard error of the estimate predicted dependent variable. In our case it is a very small fraction. The t-statistics is used to know whether each and every independent variable is individually significant or not to influence the dependent variable. Most of the independent variables should be individually significant. If the p-value is less than %5 we can reject the null hypothesis and accept alternative hypothesis. If we can reject the null hypothesis such as in our case, it means that particular independent variable is significant to influence the dependent variable except for DIBS. Also mark that tstatistics and p-values always move in opposite directions. If we look at the F-Statistics (ANOVA) we have a significance which shows the goodness of fit of the model. The lover the value, the better the fit. Typically, if the value

is greater than 0.05, we conclude that our model could not fit the data. In our case with a value of zero, our model is a perfect fit for the data. From the table below that was generated by SPSS, provides information effect of individual variables on the dependent variable. We can see the coefficients and the Betas for each variable in a more detailed way. According to the coefficients table below, our beta for the DIBS is -.065 with a significance level of %31 (which is way above %5) meaning that the 1 unit of change in the DIBS is going to have a -0.065 units of effect on the Foreign investment in Turkish capital markets with a %31 margin of error. On the other hand, the significance levels of USD/TRY and EUR/TRY are within the limits of our confidence interval which is pretty impressive. With a beta of -0.73 for USD/TRY and a beta of 0.415 for EUR/TRY, a unit of change in USD/TRY or EUR/TRY is going to have an effect on foreign investment in Turkish capital markets of -0.73 and 0.415 respectively.

Table 2. Coefficient of the Economic Model

Coefficients
a

Standardized Unstandardized Coefficients Model 1 (Constant) DIBS USDTL EURTL B 7.404E11 -7.600E8 -4.046E11 7.934E10 Std. Error 1.108E11 7.453E8 3.396E10 1.130E10 -.065 -.730 .415 Coefficients Beta t 6.682 -1.020 -11.913 7.021 Sig. .000 .310 .000 .000

a. Dependent Variable: ForeignInvestment

In order to find out if the model is one tailed or two tailed, we need to do a unit root test that is being done with the Augmented Dickey-Fuller test statistics in this homework. According to the Augmented Dickey-Fuller test statistic below, our tStatistics results for each significance level is negative leading to the fact that the dependent variable is not two-tailed with the probability of %71.3; therefore there can be no interval estimation for the dependent variable. When we cannot make any interval estimation for the dependent variable, we cannot make any for any parameters in this model.

Table 3. Unit Root Test

Null Hypothesis: FOREIGNINVESTMENT has a unit root Exogenous: Constant Lag Length: 0 (Automatic - based on SIC, maxlag=12) t-Statistic Augmented Dickey-Fuller test statistic Test critical values: 1% level 5% level 10% level *MacKinnon (1996) one-sided p-values. -1.103452 -3.483312 -2.884665 -2.579180 Prob.* 0.7131

Augmented Dickey-Fuller Test Equation Dependent Variable: D(FOREIGNINVESTMENT) Method: Least Squares Date: 11/29/12 Time: 16:27 Sample (adjusted): 5/29/2012 11/27/2012 Included observations: 125 after adjustments Variable FOREIGNINVESTMENT(-1) C R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood F-statistic Prob(F-statistic) Coefficient -0.010241 1.42E+09 0.009802 0.001752 9.11E+08 1.02E+20 -2755.089 1.217606 0.271985 Std. Error 0.009281 1.04E+09 t-Statistic -1.103452 1.358907 Prob. 0.2720 0.1767 2.70E+08 9.12E+08 44.11343 44.15868 44.13181 2.148873

Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion Hannan-Quinn criter. Durbin-Watson stat

Graph1. Residual Normality TEST

16 14 12 10 8 6 4 2 0 -1.6e+10

Series: RESID Sample 5/28/2012 11/27/2012 Observations 126 Mean Median Maximum Minimum Std. Dev. Skewness Kurtosis Jarque-Bera Probability
-1.2e+10 -8.0e+09 -4.0e+09 10000.0 4.0e+09 8.0e+09

0.000376 -22746965 1.10e+10 -1.52e+10 5.46e+09 -0.289454 2.690020 2.263915 0.322402

According to above graph, our Jarque-Berra statistics is 2.2639 and the corresponding p-value is 0.322. Since p-value is greater than %5 we accept null meaning that population residual is normally distributed which fulfills the assumption of a good regression line. Conclusion To sum up all the tests and results we come up with the conclusion that our assumption of DIBS, USD/TRY and EUR/TRY had a relationship with foreign investment was correct except for the Turkish government debt securities (DIBS) which had very bad test results. This means that the EUR/TRY and USD/TRY is effecting the foreign investment on Turkish capital Markets.

References Central Bank of The Republic of Turkey Database. (2012). www.tcmb.gov.tr

Damodar N. Gujarati (2003). Basic Econometrics fourth edition. Mc graw Hill