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Modeling Exchange Rate Volatility in Türkiye: An Empirical Research

Author

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  • Sinem Kutlu Horvath

    (Istanbul Universitesi, Iktisat Fakultesi, Iktisat Bolumu, Iktisat Teorisi Ana Bilim Dali, Istanbul, Turkiye)

  • Ipek M. Yurttaguler

    (Istanbul Universitesi, Iktisat Fakultesi, Iktisat Bolumu, Iktisat Teorisi Ana Bilim Dali, Istanbul, Turkiye)

Abstract

Exchange rate volatility is a concept that corresponds to the fluctuations around the equilibrium value of the exchange rate and is the main source of exchange rate risk as it adversely affects many variables that can disrupt macroeconomic stability, especially international trade, investments, and capital flows. In this context, empirical estimation and measurement of exchange rate volatility is an issue that needs to be emphasized in terms of its widespread economic effects. The effects of exchange rate volatility on basic macroeconomic variables have created a wide range of research, thus laying the groundwork for a very rich theoretical and empirical literature. This study estimates the volatility in Türkiye using theAutoregressive conditional heteroskedasticity (ARCH) and generalized ARCH (GARCH) modeling techniques alongside effective exchange rate data for the period of 2003-2022. According to the obtained findings, the study has concluded the GARCH(1,1) model to be the most appropriate model for estimating exchange rate volatility in Türkiye.

Suggested Citation

  • Sinem Kutlu Horvath & Ipek M. Yurttaguler, 2023. "Modeling Exchange Rate Volatility in Türkiye: An Empirical Research," Journal of Economic Policy Researches, Istanbul University, Faculty of Economics, vol. 10(2), pages 435-455, July.
    • Handle: RePEc:ist:iujepr:v:10:y:2023:i:2:p:435-455
    DOI: 10.26650/JEPR1217028
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    References listed on IDEAS

    as
    1. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-370, March.
    2. Hooper, Peter & Kohlhagen, Steven W., 1978. "The effect of exchange rate uncertainty on the prices and volume of international trade," Journal of International Economics, Elsevier, vol. 8(4), pages 483-511, November.
    3. Ali Eren ALPER, 2017. "Exchange Rate Volatility and Trade Flows," Fiscaoeconomia, Tubitak Ulakbim JournalPark (Dergipark), issue 3.
    4. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Effective exchange rate; Volatility; Changing variance; ARCH; GARCH JEL Classification : B22 ; C53 ; F31;
    All these keywords.

    JEL classification:

    • B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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