Abstract:

In this study, the mean and volatility spillover effects from the Euro, British pound, Japanese yen, Brazilian real, South African rand, Mexican peso, S. Korean won against US dollar to the Turkish lira against the US dollar are examined using the Cheung-Ng (1996) causality-in variance test. Structural breaks in the volatility series are also taken into account in the analyses. The FIGARCH model is used to model the volatility of the relevant foreign exchange returns, and the Bai and Perron (1998, 2003) test is applied to determine the structural breaks in the volatility series. Results indicate that there is a unidirectional mean spillover effect from Japanese yen, British pound, Mexican peso and South African rand to Turkish lira whereas it is found that there exists a bidirectional mean spillover effect between Turkish lira and Brazilian real, Euro and S.Korean won. As for volatility spillover effect, the results show that though the volatility of all currencies within the scope of the study has an significant effect on the volatility of Turkish lira, the volatility of Turkish lira mostly stems from its own internal dynamics. The study findings have important implications for both international investors and policy makers.

Keywords: