Turkish Financial Sector and Real Sector Co-Movement: MGARCH-DCC and Wavelet Coherence Analysis

Real sector has a vital role in the development of a country’s economy, especially in the significant growth of gross domestic product (GDP) per se. Verily, this tendency becomes more vibrant due to the presence of the advanced financial system. Therefore, it can be claimed that more financial sector’s development means more development in the real sector, which ultimately leads to significant growth in an overall economy. For this reason, the main purpose of this study is to investigate the dynamic relationship between the financial sector and the real sector in Turkey using different time scale frequency. In order to do this, the study applies multivariate GARCH-DCC and Wavelet Coherence techniques. Here, it uses daily basis data for two sectors—the financial sector and real sector— considering 4764 observations from 29/12/2000 to 03/04/2019. In addition, in order to obtain the same scale of data, it generates the data by using an excel log formula. After applying the techniques, the study finds a dynamic correlation between the financial sector and the real sector in Turkey. Interestingly, in most cases, the financial sector leads the real sector; however, the opposite direction is also noticeable in the study. This bilateral correlation behavior indicates that in the Turkish economy both sectors have a significant interdependence behavior— anything changes in any of the sectors has a significant impact on another sector. This behavior is true for both unconditional and condition correlation nature, even in static correlation. Finally, along with these dynamic correlation results, the study also finds that the financial sector is more volatile than the real sector in Turkey.