Uncovered Interest Rate Parity and Determining The Financial Factors Which Pull The Portfolio Investment to Turkey During The 2005-2014

Following the financial crisis of 2001, Turkey started to implement floating exchange rate regime and attracted significant amount of portfolio flows until the end of 2014 due to the structural economic reforms. In 2005-2014 period, external factors affecting the portfolio flows were relatively insignificant compared to the domestic factors and this paper aims to investigate the dominant economic variable of local economy on portfolio flows. According to the VAR analysis, the dominant economic variables on domestic economy are country risk premium-CDS and USD/TRY exchange rate respectively. The reasons behind the fact that exchange rate is more dominant than interest rate as an economic variable, can be listed as increasing current account deficits and decreasing saving ratios which stresses the importance of value-added production for Turkey