ISSN:2149-8598

The Influence of Terrorist Events on the Volatility of Foreign Exchange Market: The Case of Turkey


Terrorism is undoubtedly an issue that has not fallen from the agenda since the past. Conceptually, terror refers to actions aimed at peace and security that create fear among people. In this study, the effect of the terrorist incidents in Turkey on the exchange rate volatility was researched for the period 1990:1-2017:3. First, in the study, the rate of return of the dollar was calculated, and then unit root tests were applied. In addition, the terror index calculated by Eckstein and Tsiddon (2004) and Persitz (2006) approaches was established. Unit root tests applied for both exchange rate returns and terror index reveal that the series are stationary. With the help of the Akaike Information Criteria (AIC), it was determined that the ARMA(4,3) model is appropriate for the foreign exchange market. It is determined that ARCH effect is the result of applied ARCH test. As a result, the volatility series generated by the estimated ARCH (2) model is used as a dependent variable in the model. In addition, a dummy variable was used for the floating exchange rate regime policy, which entered into force in late of February 2001. When the volatility model results are examined, it is seen that the floating exchange rate policy has a positive effect on the foreign exchange market according to the period in which the fixed exchange rate policy is applied. That is, volatility is higher during the floating exchange rate policy period. Finally, terrorist incidents have increased the foreign exchange market volatility. But this volatility is less after 2001 than before. This result shows that there is a stable period in Turkey after 2001.


Keywords


Foreign exchange market, ARCH model, volatility, fixed and floating exchange rate, terrorism.

Author : Mehmet ÇINAR - & Aslıhan YILMAZ
Number of pages: 55-66
DOI: http://dx.doi.org/10.23929/javs.351
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Journal of Academic Value Studies (JAVStudies)
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