Abstract. Oil prices affecting production costs, inflation rates and therefore economic growth have a direct impact on stock market returns. In the last two decades sharp increases in oil prices led way to stock market collapses which were transmitted to the global economy as downturns. This paper examines the relationship between crude oil prices and sectoral returns of 18 sub-indices from Borsa Istanbul. We use monthly data for the period between January 2002 and April 2013. We apply multivariate time series analysis by conducting VAR (Vector Auto-Regression) and VECM (Vector Error Correction Model) methodology to explore the short-run and the long-run dynamics for the series under investigation. We also employ impulse response and Granger causality methods to investigate the structural relationship between the variables. We figure out a long-run equilibrium relation and a uni-directional causality from oil prices to chemicalpetroleum- plastic sub-index as oil prices directly affect the revenues of the companies operating in this sector. For the other sub-indices the empirical results suggest no longrun equilibrium relation.

Keywords: sector indices; vector autoregression; vector error correction; impulse-responses; forecast error variance decompositions.