The Risk Factors Associated with Investing in an Emerging Equity Market During the EU Membership Process

The International Journal of Business and Finance Research, Vol. 3, No. 1, pp. 1-17, 2009

17 Pages Posted: 27 Feb 2010

See all articles by Eric Girard

Eric Girard

Siena College - School of Business

Halil Kiymaz

Rollins College

Date Written: 2009

Abstract

This paper identifies the risks associated with investing in the Turkish stock market. We find that Turkish firms are more volatile than firms in countries that have recently joined the EU (our control group) and that the excess volatility is significantly associated with higher financial and economic risks rather than fundamentals. Additionally, firms’ fundamentals are as important as country risk factors in explaining stock risk premiums for the control group, while the combined effect of country risk scores has a greater impact on risk premiums than firms’ fundamentals alone for Turkish firms. Also, while Turkish stocks are sensitive to all country risk factors - economic conditions, international openness, investment profile, conflicts, and social tensions - stocks of the control group are mostly affected by only two factors, namely social tensions and economic conditions. Finally, some risks have become less relevant as a result of the changes in legal, political, and economic policies that occurred from 1999 to 2004 (the candidacy period for EU membership). Overall, Turkey has been quite successful at pursuing reforms since it began its candidacy for the EU. It has liberalized its political system and relaxed restrictions on freedom. It has also reduced hyperinflation, strengthened its currency, lowered interest rates, and provided more stable growth in GDP. However, political stability and financial and economic development appear to be issues for Turkey in its quest to become an EU member.

JEL Classification: F3, G1, N2

Suggested Citation

Girard, Eric and Kiymaz, Halil, The Risk Factors Associated with Investing in an Emerging Equity Market During the EU Membership Process (2009). The International Journal of Business and Finance Research, Vol. 3, No. 1, pp. 1-17, 2009, Available at SSRN: https://ssrn.com/abstract=1555225

Eric Girard (Contact Author)

Siena College - School of Business ( email )

Siena Hall 301
515 Loudon Road
Loudonville, NY 12211-1462
United States

Halil Kiymaz

Rollins College ( email )

Winter Park, FL 32789
United States
4076462267 (Phone)

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