How Inflation and its Uncertainty Affect Stock Returns: Insights from Borsa Istanbul

This paper investigates the impact of inflation and inflation uncertainty on stock returns in Turkey from 2006:01 to 2024:04. The study period was selected to reflect key structural changes in the Turkish economy, including the adoption of explicit inflation targeting and the process of financial deepening. Stock returns in Turkey are represented by the returns of the BIST100 index, which tracks the performance of the top 100 companies with the highest trading volume and market capitalisation. To capture the effects of inflation uncertainty, ARCH/GARCH models are employed. The Johansen cointegration analysis is used to estimate the long-term relations among the variables, while FMOLS, DOLS, and CCR methods are applied to estimate long-run coefficients. The findings point out that both inflation and inflation uncertainty positively influence stock returns in Turkey. In particular, a rise in inflation uncertainty has a stronger impact on boosting stock returns than a rise in inflation itself. These results suggest that stocks serve as a safe investment option in inflationary environments.