Domestic and Global Causes for Exchange Rate Volatility: Evidence From Turkey

ÖZKAYA A., Altun O.

SAGE Open, vol.14, no.2, 2024 (SSCI) identifier

  • Publication Type: Article / Article
  • Volume: 14 Issue: 2
  • Publication Date: 2024
  • Doi Number: 10.1177/21582440241243200
  • Journal Name: SAGE Open
  • Journal Indexes: Social Sciences Citation Index (SSCI), Scopus, Academic Search Premier, ERIC (Education Resources Information Center), Directory of Open Access Journals
  • Keywords: Chaos, exchange rate volatility, GARCH, Lyapunov exponent, market efficiency, systemic risk
  • Galatasaray University Affiliated: Yes


Understanding which factors influence exchange rate movements is important for understanding economic development, trade patterns, investment decisions, and for designing economic policies. In this study, we allow for monetary, domestic and global financial variables to assess the relevant importance of each of the variables to exchange rate volatility in the case of Turkey. The paper investigates the dynamics of exchange rate volatility of the Turkish lira in a complementary perspective by employing both Generalized autoregressive conditional heteroskedasticity (GARCH) method and Lyapunov exponents over the period from March 1, 2019 to November 11, 2021. Firstly, decomposing the impact of domestic and global financial variables, the results of the GARCH model indicate that the exchange rate volatility is affected by Volatility index (VIX) and Credit default swaps (CDS). This result suggests that the exchange rate shocks experienced are mainly caused by global factors, therefore policymakers should focus on volatility spillovers caused by global financial markets. Secondly, detected positive maximal Lyapunov exponent shows that complexity in foreign exchange markets has been increased, market expectations lead to multiple-equilibria and diverging volatility eventually will generate recurrent spikes in currency value. These complementary findings have important implications for interventions of Central banks and preventing systemic risks, as well as portfolio and risk management.