Financial Market Efficiency in Turkey: Empirical Evidence from Toda ...

European Journal of Economics, Finance and Administrative Sciences 

ISSN 1450-2275 Issue 13 (2008) 

© EuroJournals, Inc. 2008 

http://www.eurojournalsn.com 

Financial Market Efficiency in Turkey: Empirical Evidence 

from Toda Yamamoto Causality Test 

Abdullah Yalama 

Department of Business Administration (Finance), Eskisehir Osmangazi University 

Tel: +90 0533 3584695 

E-mail: abdullahy@ogu.edu.tr 

Sibel Çelik 

Department of Applied Science Institute (Insurance and Risk Management) 

Dumlupınar Universit, 

Tel: +90 0543 4292573 

E-mail: sibelcelik1@gmail.com 

Abstract 

The purpose of study is to investigate semi strong form efficiency in Istanbul Stock 

Exchange Market, Foreign Exchange Market and Interbank Money Market in respect to 

changes in Currency in Circulation by using Toda Yamamoto Causality Test. As a result, 

there is a causality relationship running from Currency in Circulation to Foreign Exchange 

Market and Currency in Circulation to Interbank Money Market; however there is no 

causality relationship running from Currency in Circulation to Istanbul Stock Exchange 

Market. This result implies that while money markets are semi strong form efficient, 

capital market is not in Turkey. 

Keywords: Efficient Market hypothesis, Toda Yamamoto Causality Test, Emerging 

Market, Turkey 

I. Introduction 

Efficient Market Hypothesis (EMH), defined as a market in which prices always reflect available 

information, has received a great deal of attention in finance literatüre for years (Fama, 1970). 

This paper investigates semi strong form efficiency in Istanbul Stock Exchange Market (ISE- 

100), Foreign Exchange Market (FEM) and Interbank Money Market (IMM) in respect to changes in 

Currency in Circulation (CIC). In the literature, EMH mostly focuses on one market. This study differs 

from common literature in terms of focusing three market’s efficiency. 

This paper is organized as follows: Section 2 presents the specific literature of comparable 

studies, Section 3 describes the data and the research method employed; section 4 stress researched 

restriction, section 5 shows the empirical evidence of Toda Yamamoto Causality test, and finally 

section 6 provides the summary and conclusion. 

II. Literature Review 

Efficient Market Hypothesis is controversial in the literature. For developed countries, some empirical 

studies emphasized market inefficiency (in Stock Exchange Market: Niederhoffer and Osborne, 1966;

89 European Journal of Economics, Finance And Administrative Sciences - Issue 13 (2008) 

Fama and French 1988; Poterba and Summers, 1988; Lo and MacKinlay 1988; in Foreign Exchange 

Market: Hakkio and Rush, 1989), on the contrary some emphasized market efficiency (in Stock 

Exchange Market: Fama 1965, 1970; Samuelson 1965, Cooper 1974, Brown and Easton, 1970; in 

Interbank Money Market: Fildes and Fitzgerald, 1980; in Foreign Exchange Market: Lajaunie, 

McManis Naka, 1996). In addition to developed countries, EMH is disputable in emerging markets as 

well. As the same of developed markets, there is some practical evidence supporting the efficiency 

hypothesis (in Stock Exchange Marke: Alam and at all, 1997; Magnusson and Wydick, 2002); while 

some does not (in Stock Exchange Market: Kusi and Menyah, 2002; Smith, Jefferis and Ryoo, 2002; 

Gupta and Basu, 2007; in Foreign Exchange Market: Sarwar, 1997). When we compare the result of 

studies in developed and emerging countries, it is clear that studies in developed markets show stronger 

evidence of efficiency than emerging markets. 

In Turkey, difference from general literature; researches generally focus on testing the semi 

strong form (Metin and Muradoğlu, 1996; Muradoğlu, Önkal, 1992; Balaban, Candemir, Kunter, 1996) 

or weak form efficiency (Aga and Kocaman, 2008; Buguk and Brorsen, 2003) in Turkish Stock 

Exchange Market (TSEM). The results of most studies show the weak form efficiency in TSEM 

(Buguk, 2003, Ozdemir, 2008). For example; Ozdemir (2008) tests weak form efficiency in Istanbul 

Stock Exchange Market using weekly data for the period 1990-2005. As employing different 

techniques (ADF test, unit root with two structural breaks, run test and variance ratio test), he accepts 

weak form efficiency in Istanbul Stock Exchange Market. But different from the supporting literature, 

some studies reject semi strong form efficiency (Balaban and Kunter, 1996; Balaban, Candemir and 

Kunter, 1996). For instance; Balaban and Kunter (1996) test semi strong form efficiency in Foreign 

Exchange Market, Interbank Money Market and Istanbul Stock Exchange Market with respect to 

changes in Currency in Circulation for the period 1989-1995 using direct Granger Causality test. They 

conclude that financial markets are not semi strong form efficient. It is seen that few studies, in the 

literature, concentrate on Foreign Exchange Market (FEM) and Interbank Money Market (IMM). For 

example Dowla (1995) and Culbertson (1989) present some evidence supporting weak form efficiency 

in FEM, additionally Abaan (1991) demonstrates some evidence which does not support semi strong 

form efficiency in IMM. 

As a result of literature review, it can be said that EMH studies’ mostly focuses on one market 

rather than multiple markets and this study differs from general literature in terms of focusing on three 

market’s efficiency. 

III. Data and Methodology 

The data used in the empirical tests of this study is consisting of the daily frequency for the period 

02.01.1990 to 27.06.2008: Interbank Money Market Interest Rate (IMM), Istanbul Stock Exchange- 

100 Index (ISE-100), Currency Basket Index (FEM) and Currency in Circulation (CIC). All data is 

obtained from the Central Bank of Republic of Turkey. 

Toda Yamamoto causality method (Toda and Yamamoto, 1995) used for testing of semi strong 

form efficiency of ISE-100, FEM and IMM in respect to CIC in Turkey. 

To apply Toda Yamamoto causality method firstly, it is necessary to determine maximum order 

of integration of series say dmax; Since Toda Yamamoto method is valid for integrated and cointegrated 

variables. Secondly, it is necessary to determine optimal lag of VAR model using Schwarz Information 

Criterion, say k. Thirdly it is necessary to estimate (k+ dmax) th order of VAR with Seemingly Unrelated 

Regression (SUR) (Caporale and Pittis, 1999). Lastly, the hypothesis is tested using a standard Wald 

statistic test which has an asymptotic chi-square distribution with m degrees of freedom (Toda and 

Yamada, 1998). 

Model can be described as follows; 

k + d 

LISE −100t = ∑α 

1 LISE −100 

i 

t 

k + d 

i + ∑ β1 

LLCIC 

i 

t−i 

+ ξ1t 

i= 

1 

i= 

1 

− (1)


k + d 

LIFEM t = ∑α 

2 FEM i t 

k+ 

d 

i + ∑ β 2 LLCIC 

i 

t−i 

+ ξ 2t 

i= 

1 

i= 

1 

k + d 

LIIM t = ∑α 

3 LIIM i t 

k + d 

i + ∑ β 3 LLCIC 

i 

t−i 

+ ξ1t 

i= 

1 

i= 

1 

− (2) 

− (3) 

LISE-100, LFEM, LIIM and LCIC are the logarithm of Istanbul Stock Exchange-100 Index, 

Currency Basket Index, Interbank Money Market Interest Rate, and Currency in Circulation, 

respectively. k is the optimal lag order, d is the is the maximal order of integration of the series in the 

system and ξ 1t 

, ξ 2t 

and ξ 3t 

are error terms that are assumed to be white noise. 

The main hypothesis can be stated as follows; in Equation 1; LCIC is not Granger causes LISE- 

100, if β1i = 0; in Equation 2; LCIC is not Granger causes LFEM, if β2i = 0; lastly in Equation 3, LCIC 

is not Granger causes LIIM, if β3i = 0. 

IV. Research Restrictions 

In this study, only daily data of Istanbul Stock Exchange-100 Index (ISE-100), Currency Basket Index 

(FEM), Interbank Money Market Interest Rate (IMM), and Currency in Circulation (CIC) are used for 

the period 02.01.1990 to 27. 06. 2008. So the results may not generalize in other countries. 

V. Empirical Evidence 

ADF unit root test is applied for determining the order of integration of series which are presented at 

Table 1 (Dickey and Fuller, 1981). 

The result indicates that all variables are not stationary in their levels. On the other hand, all 

variables are stationary at the level of first differences I(1). Given that all variables are found to be 

integrated of order one (dmax=1). 

Table I: Unit Root Test Result 

Variables ADF –t statistic for the model without trend ADF –t statistic for the model with trend 

ISE-100 -62.25973 -62.27992 

FEM -9.389981 -9.398515 

IIM -31.89447 -31.89503 

CIC -26.30532 -26.42755 

* MacKinnon critical values for the significance level of 1 %, 5 % and 10 % respectively 

are as follows: for the model without trend -3,43, -2,86 and -2,56, for the model with trend ; -3,96, -3,41 and -3,12. 

The lag of level VAR models outlined in Equation 1, Equation 2, Equation 3 are k1=6, k2=6, 

and, k3=7 respectively which is selected by Schwarz Information Criterion. 

The results of the causality Wald test, obtained from the SUR estimation of (k+ dmax) th order 

of VAR model, are presented in Table II. The results for the period 1990 to 2008 indicate that there 

may be a causality relationship running from Currency in Cuirculation (CIC) to Foreign Exchange 

Market (FEM) and Currency in Circulation (CIC) to Interbank Money Market (IMM).


Table II: Toda Yamamoto Test Results (1990-2008) 

Null Hypothesis Lag (k) k+ dmax X 2 -test Conclusion 

LCIC does not Granger Cause LISE-100 6 6+1 

4.585112 

(0,5980) 

Do not Reject 

LCIC does not Granger Cause LFEM 6 6+1 

17,40361 

(0.0079)* 

Reject 

LCIC does not Granger Cause LIIM 7 7+1 

12.05877 

(0.0986)** 

Reject 

*coefficients are significant at α=0,01 level of significance 

**coefficients are significant at α=0,10 level of significance 

VI. Conclusion 

The objective of study is to investigate semi strong form efficiency in Istanbul Stock Exchange Market 

(ISE-100), Foreign Exchange Market (FEM) and Interbank Money Market (IMM) in respect to 

changes in Currency in Circulation (CIC) by using Toda Yamamoto Causality Test. In the literature 

Efficient Market Hypothesis mostly focuses on one market; this study differs from common literature 

in terms of focusing three market’s efficiency. 

As a result of Toda Yamamoto Causality Test, there is a causality relationship running from 

Currency in Cuirculation (CIC) to Foreign Exchange Market (FEM) and Currency in Circulation (CIC) 

to Interbank Money Market (CIC), however there is no causality relationship running from Currency in 

Cuirculation (CIC) to Istanbul Stock Exchange Market (ISE-100). This result implies that money 

markets are semi strong form efficient; however capital market is not in Turkey. Our results are not 

consistent with Balaban and Kunter’s studies which indicate that all three markets are not semi strong 

form efficient in Turkey. 

Our study differs from Balaban and Kunter’s (1996) supporting semi strong form efficiency in 

money markets. 

The results of our study support that money markets adjust to new information related to 

currency in circulation. At last, it may be possible for an investor to use currency in circulation to 

increase expected returns in capital markets, but it is impossible for money markets.


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