WHEN ECONOMIC POLICY UNCERTAINTY RISES: SECTORAL STOCK MARKET EVIDENCE FROM BORSA ISTANBUL

Abstract

This study examines the impact of Türkiye-specific economic policy uncertainty (TEPU) on sectoral stock returns in Borsa Istanbul, using monthly data from January 2006 to December 2024 across five sector indices: financial (XUMAL), industrial (XUSIN), tourism (XTRZM), transportation (XULAS), and technology (XUTEK). While existing literature largely focuses on developed markets and aggregate indices, this study contributes sector-level evidence from an emerging market using a panel data framework estimated with fixed effects and Driscoll-Kraay standard errors. The univariate effect of TEPU on sectoral returns is negative but statistically insignificant. Once domestic macroeconomic controls (interest rate, exchange rate, inflation) and global economic policy uncertainty (GEPU, specified in stationary first-differenced form) are included, TEPU exerts a negative effect significant at the 5% level, with exchange rate depreciation the strongest determinant among the controls. Sector-TEPU interaction test finds no significant sectoral heterogeneity in TEPU’s effect, indicating that policy uncertainty operates as a broadly systemic rather than sector-specific risk factor. The findings suggest that policy uncertainty, with unfavorable macroeconomic conditions, exerts downward pressure on sectoral valuations through higher risk premiums, weaker investment expectations, and rising financing costs. Limitations include reliance on a single domestic uncertainty proxy and a limited cross-sectional dimension constraining power to detect sectoral heterogeneity.