Associate Editors Board Academicians Prof. Dr. Alaattin TİLEYLİOĞLU, Orta Doğu Teknik University Prof. Dr. Asaf Savaş AKAT, Bilgi University Prof. Dr. Birol YEŞİLADA, Portland State University, USA Prof. Dr. Burç ULENGİN, İstanbul Teknik University Prof. Dr. Cengiz EROL, İzmir Ekonomi University Prof. Dr. Coşkun Can AKTAN, Dokuz Eylül University Prof. Dr. Doğan ALTUNER, Yeditepe University Prof. Dr. Erdoğan ALKİN, İstanbul Ticaret University Prof. Dr. Erol KATIRCIOĞLU, Bilgi University Prof. Dr. Gülnur MURADOĞLU, Cass Business School, England Prof. Dr. Halil KIYMAZ, Rollins College, MBA, USA Prof. Dr. Hatice DOĞUKANLI, Çukurova University Prof. Dr. İhsan ERSAN, İstanbul University Prof. Dr. Kürşat AYDOĞAN, Bilkent University Prof. Dr. Mahir FİSUNOĞLU, Çukurova University Prof. Dr. Mehmet ORYAN, İstanbul University Prof. Dr. Mehmet Şükrü TEKBAŞ, İstanbul University Prof. Dr. Nejat SEYHUN, University of Michigan, USA Prof. Dr. Nicholas M. KIEFER, cornell University, USA Prof. Dr. Niyazi BERK, Bahçeşehir University Prof. Dr. Nuran Cömert DOYRANGÖL, Marmara University Prof. Dr. Oral ERDOĞAN, Bilgi University Prof. Dr. Osman GÜRBÜZ, Marmara University Prof. Dr. Reena AGGARWAL, Georgetown University, USA Prof. Dr. Reşat KAYALI, Yeditepe University Prof. Dr. Rıdvan KARLUK, Anadolu University Prof. Dr. Robert JARROW, Cornell University, USA Prof. Dr. Robert ENGLE, NYU-Stern, ABD Prof. Dr. Targan ÜNAL, İstanbul University Prof. Dr. Taner BERKSOY, Bahçeşehir University Prof. Dr. Ümit EROL, Bahçeşehir University Prof. Dr. Ünal BOZKURT, İstanbul University Dr. Veysi SEVİĞ, Marmara University Prof. Dr. Zühtü AYTAÇ, Bilkent University Professionals Adnan CEZAİRLİ Dr. Ahmet ERELÇİN Assoc. Prof. Ali İhsan KARACAN Dr. Atilla KÖKSAL Bedii ENSARİ Dr. Berra KILIÇ Prof. Dr. Bhaskaran SWAMINATHAN Assoc. Prof. B. J. CHRISTENSEN Cahit SÖNMEZ Çağlar MANAVGAT Çetin Ali DÖNMEZ Emin ÇATANA Erhan TOPAÇ Dr. Erik SIRRI Filiz KAYA Assoc. Prof. Hasan ERSEL Prof. Dr. Kenan MORTAN Mahfi EĞİLMEZ Dr. Meral VARIŞ KIEFER Muharrem KARSLI Assoc. Prof. Dr. Ömer ESENER Reha TANÖR Serdar ÇITAK Sezai BEKGÖZ Tolga SOMUNCUOĞLU Prof. Dr. Ünal TEKİNALP Prof. Dr. Vedat AKGİRAY Online Access: ISE REVIEW, Quarterly economics and Finance review published by the Istanbul Stock Exchange. Starting with Volume 3 No: 10 issue (year 1999), full-text articles published in the ISE Review are now available through the Internet in pdf format. Abstracts: Abstracts of all articles published in the ISE Review are available through the ISE website. The database covers all abstracts of refereed journal articles published since 1997. (1) http://www.imkb.gov.tr/yayinlar-html (2) Select: ISE Review For further informaiton, comments and suggestions please contact. Tel: (90.212) 298 21 71 The ISE Review Price and Payment Information: Hard Copy US$ 7.5 per copy (Issue No. 47) Wire transfer to T. İş Bankası Borsa Branch Account No. 1125 4599 (US$ account) Please write the name of the publication and send us a copy of the receipt. Please do not send cash. Address: İMKB (ISE) Strategy Development and Research Department Reşitpaşa Mah., Tuncay Artun Cad. Emirgan 34467 Istunbul-TURKEY Tel: +90 212 298 21 71 Fax: +90 212 298 21 89 The ISE Review Volume: 12 No: 47 CONTENTS The Effect of Foreign Portfolio Investments in the ISE: An Index-Based Study .......................................................................................... 1 Bekir Elmas Stock Price Reactions to Merger Announcements: Evidence from Istanbul Stock Exchange (ISE) ................................................... 19 Berna Kırkulak Uludağ & Özlem Demirkaplan Gülbudak A Game Theoretic Approach to Model Financal Markets: Guessing Game ................................................................................................... 43 Ü. Barış Urhan & Zafer Akın Global Capital Markets .................................................................................... 61 ISE Market Indicators ...................................................................................... 71 ISE Publication List .......................................................................................... 75 _________________________________________________________________ The ISE Review is included in the “World Banking Abstracts” Index published by the Institute of European Finance (IEF) since 1997, in the Econlit (Jel on CD) Index published by the American Economic Association (AEA) as of July 2000, and in the TÜBİTAK-ULAKBİM Social Science Database since 2005. The ISE Review Volume: 12 No: 47 ISSN 1301-1642 © ISE 1997 THE EFFECT OF FOREIGN PORTFOLIO INVESTMENTS ON THE ISE: AN INDEX-BASED STUDY Bekir ELMAS* Abstract Foreign shares in the market of the developing countries increased to significant levels with the financial globalization. Istanbul Stock Exchange (ISE) is the only stock market of Turkey. It is seen that the foreign investors are generally institutional investors; their shares fluctuate around 65-70% and sometimes exceed over 70 %. Depending on these two factors, it is obvious that the foreign investors have a significant effect on the ISE indexes. This study aims to determine whether a change in the foreign share have an effect on the increases and decreases of the indexes calculated in the ISE and to determine the influence. The foreign share in the ISE and 12 index variables calculated in the ISE were adopted as the data set. Consequently, it was determined that the foreign investor movements were generally not the triggering factor in the increases and decreases in the ISE-100 index and the other indexes; on the contrary, the foreign investor increased or decreased their investments by following the movements (increase/decrease) in the other indexes. I. Introduction The notion of globalization evolved with different means in the historical course in parallel with the capitalist development. Elementarily, the globalization of commerce after the Industrial Revolution until the 2nd World War, the globalization of production until 1970s and the globalization of finance after 1970s occurred respectively (Öztürk, 2001). __________________________________________________________________________________________________________________________________ * Assist. Prof. Dr. Bekir Elmas, Atatürk University, Faculty of Economics and Administrative Sciences, Department of Business Administration, Accounting and Financing. Tel: 90 (442) 231 14 63 E-mail: [email protected] Key Words: Foreign Portfolio Investments, Index, ISE JEL Classification: G-21, G-12, G-32. 2 Bekir Elmas The globalization of finance means the liberalization of the international capital movements and transactions of supply and demands of funds and the participants of the financial market in more appropriate environments without geographical limitations (Eroğlu, 2002). In other words, financial globalization is the removal of the boundaries dividing the national financial markets and opening of the financial markets to the international competition by removing the controls and limitations on these markets, convertibility of the markets, letting the fluctuation in exchange rates, increase in the international capital flows, increase in the role of new kind of institutional investments such as investment funds and investment partnerships in the financial markets. (http://tr.wikipedia.org/wiki/Finansal_liberalizasyon). The main requirement of the financial globalization is the Financial Integration. The Financial Integration is the removal of the difference between the rate of returns with cost of funds in different financial markets (Eroğlu, 2002). Until mid-1970s, one of the common aspects in the economy policies applying in the developing countries was the intervention in the financial markets (Galbis, 1977). In the 1980s, most of the developing countries began the process of the financial globalization by removing the limitations against the foreign investors. The developments in communication and improvements in accessing information enabled the formation of a global commercial system and the integration of the financial markets in the world (Frenkel, 2003). In Turkey which has a developing economy, the financial globalization process continued with the announcement of the decree in 24th January 1980 and the other measures taken in 1980 (Yüce, 1997). The opening of the ISE in 1986 and the issuance of Decree No.32 in August 1989 which permitted the foreign investors to invest in all kinds of securities and transfer the proceeds was a part of the financial globalization process. With financial globalization, foreign investors’ entry process especially to the developing financial markets accelerated. Entry of the foreign investors in financial markets brings along some disadvantages as well as some benefits. The benefits of the entry of foreign investors to financial markets are (Adabag and Ornelas, 2004); - The market investors spread to a wider base and the liquidity and risk sharing increases in the market. - While market volatility decreases in the long term, the effectiveness of the market increases. The Effect of Foreign Portfolio Investments on the ISE: 3 An Index-Based Study - As a consequence of market regulators’ demand for more improvements of the rules and regulations, more better quality and sufficient information flows to the market. - With the appearance of more transitional markets, better distribution of the sources and the healthier markets occur. The disadvantages of the entry of foreign investors to financial markets are (Adabag and Ornelas,