International Business Research; Vol. 9, No. 1; 2016 ISSN 1913-9004 E-ISSN 1913-9012 Published by Canadian Center of Science and Education 176 Frequency Domain Causality Analysis of Interactions between Financial Markets of Turkey Mustafa Ozer 1 & Melik Kamisli 2 1 Faculty of Economics and Administrative Sciences, Anadolu University, Eskişehir, Turkey 2 Department of Banking and Insurance, Bozüyük Vocational School, BilecikŞeyh Edebali University, Bilecik, Turkey Correspondence: Melik Kamisli, Department of Banking and Insurance, Bozüyük Vocational School, Bilecik Şeyh Edebali University, Bilecik, Yeşilkent Mahallesi 1036 Sokak, Bozüyük, 11300, Turkey. Tel: 90-228-214-1111. E-mail: melik.kamisli@bilecik.edu.tr Received: November 2, 2015 Accepted: December 15, 2015 Online Published: December 25, 2015 doi: 10.5539/ibr.v9n1p176 URL: http://dx.doi.org/10.5539/ibr.v9n1p176 Abstract In this paper, we examined the dynamic linkages between financial markets of Turkey by using frequency domain causality analysis, proposed by Breitung and Candelon (2006), for the weekly Turkish data from 2003 to 2015. The results show that there are volatility spillovers from stock market returns to interest rate and EURO both in the mid and long terms, and short and medium-terms to U.S. Dollar; but, from U.S. Dollar to stock market returns in the short-term. In the long-run, EURO exchange rate Granger cause to interest rate; but, interest rate Granger cause to EURO exchange rate in the short-run. On the other hand, there is no evidence of volatility spillovers from EURO and interest rate to stock market returns. Based on these results, we can conclude that there are certain degree of interdependence and volatility spillovers among the financial markets of Turkey, which have serious policy implications. Keywords: frequency domain causality, traditional Granger causality, volatility spillovers 1. Introduction Following 2001 Crisis, Turkey has been considered as one of the leading emerging financial markets on which international investors and financial market professionals have focused their attention and has become investment icon in the global financial markets, since Turkey has been one of the leading country that provided profitable investment opportunities to foreign investors. In this development, policies, such as liberalization of foreign capital accounts and adoption of more flexible exchange rate regimes that implemented in early 1980s have played crucial role. Along with these factors and emergence of new also increased the interest of academicians, policy makers and professional investors in studying the interactions between financial markets within and across countries. On the other hand, even though the liberalization of foreign capital controls in emerging markets, especially in Turkey, has opened the possibility of international investment and portfolio diversification, it is also true that the adoption of more flexible exchange rate regimes by these countries has contribute to increase the volatility of foreign exchange markets and the risk associated with such investments. For example, as Rahman and Uddin (2009) pointed out, the interactions between stock prices and exchange rates have been seen crucial by the academicians, market professionals and policy makers, since they both create significant effects on the development of a country’s economy. Also, we know that fundamentalist investors often use the relationships between stock prices and foreign exchanges to predict the future trends for each variables. Moreover, since the currency is included as an asset in the portfolios of professional investors, managers of these institutions might benefit from the information about the direction and sign of the causal relationship between exchange rates and stock prices to manage risks efficiently. Finally, allowing the free flows of capital has created investment opportunities for multinational corporations especially in emerging countries. To understand properly the nature and the direction of the causality between these two important variables, first we have to understand theoretical explanations of the relations between two. There are two alternative explanations of the relationships between exchange rates and stock prices. These are the traditional and portfolio approaches. According to the traditional approach, because of the depreciation of the domestic currency, local firms become more competitive and they increase their exports. The rising exports of these firms can contribute