Nonlinear dynamics in financial time series and unit root tests: case of Borsa Istanbul sectoral price-earnings ratios

Abstract

Because of the variables which are falling within the scope of finance and the analysis are more reliable and are performed with high frequency series, financial time series pay special attention to empirical studies. Observed nonlinear effects on series are one of the popular subjects for time series econometrics in the last years. Nonlinear dynamics are studied under two main topics in the literature--Structural Break and Regime Switching. Structural Break is the best known nonlinear econometrics subject in Turkey. In this paper, structural break and regime switching dynamics that can be observed in time series are investigated and unit root test which are developed according to this dynamics are mentioned. At the end of the paper, price-earning ratio of Borsa Istanbul 100 Index dealt with on a sectoral basis and the nonlinear unit root tests are applied on related time series.