SPILLOVER EFFECT OF FINANCIAL STRESS ON TURKISH BANKING, INSURANCE, LEASING, FINANCIAL SECTOR INDICES AND FOREIGN EXCHANGE MARKET

Abstract

This study examines the short- and long-term spillover effects of financial stress indicators (the US, other developed economies, and emerging markets) on various Turkish financial sectors such as BIST banking, BIST insurance, BIST factoring, BIST financial subsector indices, and the currency market. The analysis employs a frequency-connectedness methodology developed by Baruník & Křehlík (2018). The results indicate that the financial stress indices have a notable influence on the yearly return of Turkish financial stock sub-indices, with the spillover effect being more pronounced in the currency market. The insurance industry has been found to be relatively vulnerable compared to other equity indices. No discernible disparities were observed in the spillover effect of regional financial distress. In general, around 33% of the overall spread takes place during a short period of time, while the remaining 67% occurs over a longer duration. During periods of severe economic events, such as economic crises, wars, trade wars, and health crises, there is a significant increase in the total spillover index. These findings offer investors, regulators, and governments systematic insights to accurately detect and mitigate financial risks in Türkiye.