A SIMPLE CORELATIONAL ANALYSIS Overnight Interbank Rates and istanbul Stock Exchange

The impact of economy wide liquidity shortages on the stock markets is a well documented economic phenomenon. I t is intuitive to t h i n k that this impact is further augmented i n t h i n equity markets. İSE can safely be considered such a t h i n market and therefore i t is claimed that l i q u i d i - t y shortages i n the economy causes frequent fluctuations i n the stock market. The overnight interbank interest rates i n Turkish financial markets represent the interest on the shortest maturity claims and considered to be a sound measure of the short swings i n the liquidity need of the economy. Although overnight interbank rates are to some extent affected by the longer term interest rates, they more accurately reflect the short term flactuations of the îiquidity need i n the economy. Instances such as corporate tax payments, replenishment of the disponibility reserves of the majör banks create sharp fluctuations in the interbank rates which are independent of the longer term interest rates. Also i t was considered to be an indictor of then (during the study period) iliegel repurchase (repo) market rates. Although regulations i n the financial markets (Decree by Law 35, Article 29) prohibited repurchase agreements between fmancial mstitutions and fınancial institutions and t h i r d parties, there was a very active repurcahse market for the short term treasury bills and other government bonds. I t is claimed that almost 60% of the transactions involving government issued securities are repurchase agreements (Altay, Beyazitoglu and Ersel, 1988). Repos can be used as profîtable substitutes for the time deposits since repos do not require any reserve posting i n the Central Bank. This reduces the cost of the short term funds for the banks and practically leads to higher short term interst rates than the time deposits. Since corporations can derive higher interest rates on their short t e rm investments, they prefer repos över time deposits. Although there is no documentation, i t is claimed that the average maturity i n the repo market ranges from 2-3 days to six weeks. The most active partcipants of the repo market are commercial banks and brokerage firms who hold large inventories of t-bills and government bonds since their returns are tax exempt. On the other hand ali the corporations, who desire to obtain higher returns on their excess cash than the time deposits, constitute the demand side.