Türkiye | A Model of Portfolio Flows

Summary

We present an econometric model in order to estimate the global and domestic macroeconomic determinants of portfolio flows into Türkiye. Our findings point to the significant relationship between flows and market volatility and economic policy uncertainty on the global side, and risk premium on the domestic front.

Key points

• Key points:
• Our study categorizes the determinants of portfolio inflows across global “push” factors which are market volatility (VIX), global economic policy uncertainty and the portfolio flows into emerging economies (excluding China and Türkiye) and domestic “pull” factors such as financial conditions, real returns to the investor, economic activity and risk premium.
• While the literature treats Türkiye’s and U.S. real interest rates separately—as pull and push factors—we advance it by combining these variables to better capture what drives foreign portfolio investment in Türkiye. Our model shows that the expected USD return on TL assets was a key factor in capital inflows during the period analyzed.
• Our quarterly Bayesian VAR model yields statistically significant relationship between both pull and push variables. In the meantime, we improve the overall explanatory power of both global (21.7%) and domestic variables (16.7%), which permits much better forecast performance.
• The historical breakdown of portfolio flows shows a clear shift before and after 2015: both push and pull factors drove inflows pre-2015. From 2018 onward, pull factors led to outflows—except in 2024, when economic normalization and higher yields amid monetary tightening likely improved the country’s risk profile and drew in investments.
• We employ a forecasting exercise around 4 different retrospective scenarios, with differing degrees of uncertainty and risk factors. The most severely adverse scenario incorporating both the tariff shock on the global side following Trump’s “Liberation Day” orders and the confidence shock that happened on March 19th following political developments on the domestic side, correspond to significant outflows reaching near $11.2 billion USD for the total of 2025.

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