NEGATIVE CURRENCY-RISK-EXPOSURE FOR TURKISH EQUITIES

Currency-risk-exposure is an issue for Turkish equities, from two different angles: internationaltrade and foreign-portfolio-investment. The likely effect is positive for the former, and negative for the latter aspect. Consequently, the overall or net effect on equity value depends on which of these aspects of currency-risk-exposure has the greater impact. The present empirical analysis estimates currency risk of Turkish equities within a multi-factor regression setting, utilizing the framework of the Security Market Plane (SMP) model. The SMP model embodies a conditional relation among three variables: beta, realized excess market-return, and expected excess portfolio-return. The SMP empirical framework is extended to include a currency-risk-factor in the present analysis. The currency-risk-factor is specified as the excess return to holding foreign currency (€; $), relative to holding domestic currency (Turkish Lira). The SMP-related factor is the cross-product term of beta and realized excess market-return (β it rMt ). A regression of realized excess portfolio-returns against the corresponding currency-risk-factor and cross product-term (β it rMt ) finds that the Turkish stocks represented in the analysis generally have overall negative currency-risk-exposure; suggesting that unexpected currency depreciation generally leads to lower values for Turkish stocks (and portfolios of Turkish stocks). Thus, after accounting for the SMP-related interaction-effect between beta and realized excess marketreturn, currency risk is found to command a premium for the Turkish stocks represented in the analysis