ECONOMIC POLICY UNCERTAINTY, UNEXPECTED INFLATION DEVELOPMENTS, AND RISK-ON CONDITIONS IN THE TURKISH EQUITY MARKET: EVIDENCE FROM A NARDL APPROACH

Purpose – The purpose of this study is to investigate the dynamic relationship between economic country-specific uncertainty, model-based inflation surprises, and equity-market risk-on conditions in Türkiye. The study specifically examines whether positive and negative changes in uncertainty and inflation innovations exert asymmetric effects on Turkish equity-market dynamics. In contrast to studies that directly interpret stock market returns as a behavioral measure of investor psychology, this article conceptualizes broad Turkish share-price growth as a market-implied risk-on proxy reflecting aggregate portfolio allocation behavior under conditions of macroeconomic uncertainty and high inflation. The Turkish economy provides an important empirical setting due to the coexistence of persistent inflationary pressures, exchange-rate volatility, monetary-policy revisions, and elevated uncertainty during the post-2013 period. Methodology – The study employs a nonlinear autoregressive distributed lag (NARDL) framework using monthly data covering the period from 2013M03 to 2024M12. The dependent variable is the monthly growth rate of broad Turkish share prices obtained from OECD/FRED databases. Economic uncertainty is represented by the Türkiye Economic Country-Specific Uncertainty (ECSU) index, while inflation surprises are constructed from the residuals of an autoregressive AR(1) inflation process based on monthly CPI inflation. Positive and negative movements in uncertainty and inflation surprises are decomposed into partial sums in order to test potential short-run and long-run asymmetries. The empirical specification incorporates unit-root screening procedures, bounds-testing logic for cointegration, Wald symmetry tests, and heteroskedasticity and autocorrelation consistent (HAC) standard errors to ensure econometric robustness. Findings – The empirical findings reveal a strong and statistically significant error-correction mechanism, indicating that approximately 74.4% of short-run disequilibrium is corrected within one month. The joint significance test of lagged level variables strongly supports the existence of a stable long-run relationship among uncertainty, inflation surprises, and equity-market risk-on conditions (F = 21.920, p < 0.001). The estimated long-run coefficients of uncertainty components are negative, suggesting that higher economic uncertainty weakens market-implied risk-on behavior. In the short run, however, positive inflation surprises exert a statistically significant positive effect on Turkish equity-market risk-on conditions. This finding implies that investors may shift toward equities as a defensive portfolio response when inflation unexpectedly accelerates and nominal assets lose real value. Nevertheless, Wald symmetry tests fail to reject both long-run and short-run symmetry hypotheses, indicating that positive and negative shocks do not generate statistically different effects within the sample period. Conclusion – Based upon the empirical analysis, it may be concluded that economic uncertainty and inflation surprises are dynamically associated with Turkish equity-market risk-on conditions in a high-inflation emerging-market environment. The study contributes to the macro-finance literature by integrating model-based inflation innovations into a country-specific uncertainty framework and by carefully distinguishing market-implied risk-on behavior from direct psychological measures of investor risk appetite. Although the NARDL framework provides valuable insights into adjustment dynamics and equilibrium relationships, the evidence does not support statistically significant asymmetry. The findings therefore emphasize the importance of rapid market adjustment mechanisms and inflation-related portfolio substitution effects rather than nonlinear asymmetrical responses. Keywords: Economic policy uncertainty, inflation surprises, equity markets, risk-on conditions, NARDL J