Portfolio Balance Approach to Exchange Rate Determination: Testing a Model by Applying Bilateral Data of Turkey and United States1

Abstract

Turkish economy started to be liberated in the

beginning of 1980’s and gradually to be a part of

global economic and financial system. But as a result

of economic articulation of Turkey to the global

world, global economic and financial headwinds

have affected trade and economy especially via

exchange rates. Since Turkey is of ever-growing

foreign trade volume with global economic world

determination of fluctuations in exchange rates has

increased in importance. Due to global integration

of financial markets, inflow and outflow of foreign

bonds could cause economic agents to change

currency composition of foreign assets to reduce

the risks arisen from exchange rates. This situation

can negatively affect exchange rates by fluctuating

them. Aim of this study is to empirically investigate

the portfolio balance effect on exchange rates. In

this context, different version of Cushman’s model

(2007) using monthly bilateral data of Turkey

and U.S. covering the period 2006-2016 will be

employed and portfolio balance approach to the

exchange rates determination will be tested by

performing cointegration test allowing for multiple

structural breaks.

Keywords

• Exchange Rate Determination Approaches,Portfolio Balance,Risk Premium,Maki Cointegration Test

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