Investigating the impacts of risk appetite on the formation of time-varying effıcient market structure in Borsa Istanbul

Purpose – The purpose of this research is to investigate the time-varying efficient market structure of the Borsa Istanbul (BIST-100) index at a daily frequency from 1988 to 2024, as well as to examine the impact that the risk appetite index (VIX) has on this structure. Methodology – A vector autoregression (VAR) model and a time-varying variance ratio test are used in this research project to evaluate the effectiveness of the market and its time-varying dynamic development. Findings – According to the findings, market efficiency changes over time due to domestic and global political issues. This suggests that market efficiency is not static but rather dynamic. The market had a low level of efficiency between the years 1988 and 1995, then moved to a semi-efficient form between 1995 and 2002, and then reached a strong form between 2002 and 2010, despite undergoing fluctuations. Worldwide crises caused these fluctuations. For the period spanning from 2010 to 2020, the most significant degree of efficiency and the most efficient flow of information is shown. On the other hand, following 2020, market efficiency exhibited a complicated pattern, alternating between semi-efficient and strong forms. Conclusion – Risk appetite shocks favorably impact short-term market efficiency but adversely impact market efficiency over the long term. In this context, information asymmetry and irrational investment conduct seem to contribute to a gradual decline in market efficiency. The research contributes to the existing form of knowledge by providing a methodological framework that can be used to analyze the development of dynamic market efficiency. Furthermore, the results shed light on the need for policymakers to pursue structural changes based on behavioral finance to maintain market efficiency. Keywords: Efficient Market Hypothesis, time-varying variance ratio, risk appetite, Borsa Istanbul, market shocks.