alphanumeric journal
The Journal of Operations Research, Statistics, Econometrics and Management Information Systems
Analysis of the Relationship between Real Effective Exchange Rate, Common Equity Tier 1 Ratio and Return on Equity: Evidence from Turkey
bib
Abstract
The analysis of the relationship between exchange rate fluctuations, common equity and return on equity is of high importance to be able to improve adequate policies with the purpose of maintaining stability in foreign exchange rate, when it is taken into consideration that mentioned fluctuations lead to the loss in bank capital and profitability. Hence, the studies in the related literature have been increasing in great amount recently. The objective of this study is to investigate the relationship between real effective exchange rate, common equity and return on equity in the period of 2014:01 - 2018:09. The unit root properties of the series are tested by using Carrion-i Silvestre et al.(2009) unit root test and the cointegration relationship between the series is investigated by employing Maki(2012) cointegration test. Both tests take into account multiple structural breaks. The results indicate that there is only a long run relationship between real effective exchange rate and return on equity for Turkish Banking Sector with structural breaks.
Keywords: Common Equity, Real Effective Exchange Rate, Return on Equity, Structural Breaks, Turkish Banking Sector
Jel Classification: C22, E44, G21
Suggested citation
(). Analysis of the Relationship between Real Effective Exchange Rate, Common Equity Tier 1 Ratio and Return on Equity: Evidence from Turkey. Alphanumeric Journal, 7(2), 319-332. http://dx.doi.org/10.17093/alphanumeric.521848
References
- Abba, G.O., Zachariah, P. and Inyang, E.E., 2013, Capital Adequacy Ratio and Banking Risks in the Nigeria Money Deposit Banks. Research Journal of Finance and Accounting 4 (17), 17-25.
- Aburime, T., 2008, Determinants of Bank Profitability: Macroeconomic Evidence from Nigeria. 1-34. Available at SSRN:https://ssrn.com/abstract=1231064.
- Acaravci, S.K. and Calim, A.E., 2013, Turkish Banking Sector’s Profitability Factors. International Journal of Economics and Financial Issues 3(1), 27-41.
- Athanasoglou, P., Brissimis, S. and Delis, M., 2008, Bank-Spesific, Industry-spesific and Macroeeconomic Determinants of Bank Profitability, Journal of International Financial Markets, Institutions and Money 18 (2), 121-136.
- Atindéhou, R.B. and Gueyie, J.P., 2001, Canadian Chartered Banks’ Stock Returns and Exchange Rate Risk. Management Decision 39(4), 285-295.
- Bai, J. and Perron, P., 1998, Estimating and Testing Linear Models with Multiple Structural Changes, Econometrica 66, 47–78.
- Bai, J. and Perron, P., 2003, Computation and Analysis of Multiple Structural Change Models, Journal of Applied Econometrics 18, 1–22.
- Bank Association of Turkey, Statistical Reports, 2017, Selected Ratios, Available at https://www.tbb.org.tr/en/banks-and-banking-sector-information/statistical-reports/20.
- Carrion-i Silvestre, J.L., Kim, D. and Perron, P., 2009, GLS based Unit Root Tests with Multiple Structural Breaks Under Both the Null and the Alternative Hypotheses, Econometric Theory 25 (06), 1754-1792.
- Central Bank of the Republic of Turkey, 2017a, Financial Stability Report 24, 1-118. Available at. http://www.tcmb.gov.tr/wps/wcm/connect/TR/TCMB+TR/Main+Menu/Yayinlar/Raporlar/Finansal+Istikrar+Raporu/2017/Sayi+24.
- Chamberlain, S., Howe, J. S. and Popper, H., 1997, The Exchange Rate Exposure of U.S and Japanese Banking Institutions, Journal of Banking & Finance 21(6), 871-892.
- Combey, A. and Togbenou, A., 2017, The Bank Sector Performance and Macroeconomics Environment: Empirical Evidence in Togo, International Journal of Economics and Finance 9(2), 180-188.
- Dickey, D. and Fuller, W., 1979, Distribution of the Estimators for Autoregressive Time Series with a Unit Root, Journal of the American Statistical Association 74, 427–431.
- Ekinci, A., 2016, The Effect of Credit and Market Risk on Bank Performance: Evidence from Turkey, International Journal of Economics and Financial Issues 6(2), 427-434.
- Elliott, G., Rothenberg, T. J. and Stock, J. H., 1996, Efficient Tests for an Autoregressive Unit Root, Econometrica 64, 813–836.
- Engle, R.R. and Granger, C.W.J., 1987, Cointegration and Error Correction: Representation, Estimation and Testing, Econometrica 55, 251–276.
- Gregory, A.W. and Hansen, B.E., 1996, Residual-Based Tests for Cointegration in Models with Regime Shifts, Journal of Econometrics 70, 99-126.
- Hatemi-J, A., 2008, Tests for Cointegration with Two Unknown Regime Shifts with An Application to Financial Market Integration, Empirical Economics 35(3), 497-505.
- He, Ling T., Fayman, A. and Casey, K. M., 2014, Bank Profitability: The Impact of Foreign Currency Fluctuations, Journal of Applied Business and Economics 16(2), 98-104.
- Johansen, S., 1998, Statistical Analysis of Cointegration Vectors, Journal of Economic Dynamics and Control 12, 231–254.
- Johansen, S., 1991, Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models, Econometrica 59, 1551–1580.
- Jokipii, T. and Milne, A., 2011, Bank Capital Buffer and Risk Adjustment Decisions, Journal of Financial Stability 7, 165-178.
- Kapetanios, G., 2005, Unit-Root Testing against the Alternative Hypothesis of up to m Structural Breaks, Journal of Time Series Analysis 26, 123–133.
- Kasman, S., Vardar, G. and Tunç, G., 2011, The Impact of Interest Rate and Exchange Rate Volatility on Banks’ Stock Returns and Volatility: Evidence from Turkey, Economic Modelling 28(3), 1328-1334.
- Maki, D., 2012, Tests for Cointegration Allowing for an Unknown Number of Breaks, Economic Modelling 29(5), 2011-2015.
- Moussa, M.A., 2015, The Determinants of Bank Liquidity: Case of Tunisia, International Journal of Economics and Financial Issues 5(1), 249-259.
- Ng, S. and Perron, P., 2001, Lag Length Selection and the Construction of Unit Root Tests with Good Size and Power, Econometrica 69, 1519–1554.
- Ogege, S., Wiliiams, H.T. and Emerah, A., 2012, An Empirical Analysis of Capital Adequacy in the Banking Sub-Sector of the Nigeria Economy, International Journal of Economics and Finance 4(5), 208-215.
- Perron, P., 1989, The Great Crash, the Oil Price Shock and the Unit Root Hypothesis, Econometrica 57, 1361-1401.
- Perron, P. and Rodríguez, G., 2003, GLS Detrending, Efficient Unit Root Tests and Structural Change, Journal of Econometrics 115(1), 1-27.
- Phillips, P.C.B. and Perron, P., 1988, Testing for a Unit Root in Time Series Regression, Biometrika 75, 335–346.
- Rao, K.R.M. and Lakew, T.B., 2012, Determinants of Profitability of Commercial Banks in a Developing Country: Evidence from Ethiopia, International Journal of Accounting and Financial Management Research 2, 1-20.
- Simiyu, C. N. and Ngile, L., 2015, Effect of Macroeconomic Variables on Profitability of Commercial Banks Listed in the Nairobi Securities Exchange, International Journal of Economics, Commerce and Management 3(4), 1-15.
- Stock, J., 1999, A Class of Tests for Integration and Cointegration. In R. F. Engle and H. White (eds.). Cointegration: Causality and Forecasting: A Festschrift in Honour of Clive W. J. Granger, Oxford University Press. 135-167.
- Sufian, F. and Chong, R.R., 2008, Determinants of Bank Profitability in a Developing Economy: Empirical Evidence from the Philippines, Asian Academy of Management Journal of Accounting and Finance 4(2), 91-112.
- Sufian, F. and Kamarudin, F., 2012, Bank-Specific and Macroeconomic Determinants of Profitability of Bangladesh’s Commercial Banks, Bangladesh Development Studies 35(4), 1-29.
- Taiwo, O. and Adesola, O.A., 2013, Exchange Rate Volatility and Bank Performance in Nigeria, Asian Economic and Financial Review 3(2), 178-185.
- Wong, H., Wong, T. and Leung, F., 2008, The Foreign Exchange Exposure of Chinese Banks, Journal of Finance and Economics 12(3), 123-134.
2019.07.02.ECON.06
alphanumeric journal
Pages 319-332
Received: Feb. 4, 2019
Accepted: Nov. 25, 2019
Published: Dec. 31, 2019
2019 Kılcı, EN., Kıran Baygın, B.
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence, which permits unrestricted re-use, distribution, and reproduction in any medium, provided the original work is properly cited.
scan QR code to access this article from your mobile device
Contact Us
Faculty of Transportation and Logistics, Istanbul University
Beyazit Campus 34452 Fatih/Istanbul/TURKEY
Bahadır Fatih Yıldırım, Ph.D.
editor@alphanumericjournal.com
+ 90 (212) 440 00 00 - 13219
alphanumeric journal
alphanumeric journal has been publishing as "International Peer-Reviewed Journal" every six months since 2013. alphanumeric serves as a vehicle for researchers and practitioners in the field of quantitative methods, and is enabling a process of sharing in all fields related to the operations research, statistics, econometrics and management informations systems in order to enhance the quality on a globe scale.