DETERMINANTS OF EXCHANGE RATE VOLATILITY: EMPIRICAL EVIDENCE FOR TURKEY

Year 2018, Volume: 5 Issue: 2, 204 - 213, 13.07.2018

Zerrin Kilicarslan

https://doi.org/10.17261/Pressacademia.2018.825

Abstract

Purpose- In the literature the effect of exchange rate volatility on various macroeconomic variables has been extensively studied but there are not enough studies about the reasons of exchange rate volatility. The aim of the research is to present the theoretical framework about the determinants of exchange rate volatility and to determine the factors affecting exchange rate volatility in Turkey for a period from 1974 to 2016.

Methodology- In this research the stationary analysis of the series is determined by the Augmented Dickey Fuller Test (ADF) and the PP (Phillips-Perron test) unit root tests. In addition the GARCH model is used to calculate the real effective exchange rate volatility. The Johansen cointegration test is used to determine whether there is a long-term relationship between variables. The coefficients of the long-run relationship between the variables are estimated by the FMOLS method.

Findings- The ADF and PP unit root test results show that the series are stationary at first difference. According to Johansen cointegration test results, it has been found that there is a long-run relationship between the variables involved in the analysis. Results from the FMOLS method for determining the direction and severity of the long-term relationship between the variables reveal that LGFCF, LMONEY and LTRADE positively affects significantly, while LFDI, LGDPC, LGGEXP negatively affects real effective exchange rate volatility.

Conclusion- The rise in domestic investment (LGFCF), money supply (LMONEY) and trade openness (LTRADE) increases the real effective exchange rate volatility, while the rise in foreign direct investment (LFDI), output (LGDPC) and government expenditures (LGGEXP) also reduces the real effective exchange rate volatility.

Keywords

Exchange rate, exchange rate volatility, GARCH, Johansen Cointegration analysis, FMOLS analysis

References

• Adusei, M. & Gyapong, E. Y. (2017), The impact of macroeconomic variables on exchange rate volatility in Ghana: The Partial Least Squares Structural Equation Modelling Approach, Research in International Business and Finance, vol. 42(C), pp. 1428-1444.
• Ajao, M. G. (2015), The Determinants of Real Exchange Rate Volatility in Nigeria, Ethiopian Journal of Economics, vol. 24, no.2, pp.43-62.
• Ajao, M.G. & Igbokoyi, O.E. (2013), The Determinants of Real Exchange Rate Volatility in Nigeria, Journal of International Studies, vol.2, no.1, pp. 459-471.
• Alagidede, P. & Ibrahim, M. (2017), On the Causes and Effects of Exchange Rate Volatility on Economic Growth: Evidence from Ghana, Journal of African Business, vol.18, no. 2, pp.169-193.
• Al-Samara, M. (2009), The Determinants of Exchange Rate Volatility in Syrian Economy, Centre de Economie de la Sarbume-Universite Paris-1-Pantheon-Sorbonne, Retrieved from http://www.tn.auf.org/CEAFE/Papiers_CEAFE10/Monnaie/Alsamara.pdf, pp. 1-36.
• Asiama, J.P. & Kumah, F.Y. (2010), Determinants of real exchange rate movements: Evidence from a Panel of African Countries (1980-2008), West African Finance and Economic Review, vol.2, no.2,pp. 48-88.
• Ayhan, F. (2016), Döviz Kuru Oynaklığı, Dış Ticaret ve İstihdam İlişkisi: Türkiye Uygulaması, (Yayımlanmamış Yüksek Lisans/Doktora Tezi). Selçuk Üniversitesi Sosyal Bilimler Enstitüsü, Konya.
• Bollerslev, T. (1986), Generalized Autoregressive Conditional Heteroskedasticity, Journal of Econometrics, vol.31, pp. 307-327.
• Calderon, C. & Kubota, M. (2018), Does Higher Openness Cause More Real Exchange Rate Volatility?, Journal of International Economics, vol. 110(C), pp. 176-204.
• Calderon, C. & Kubota, M. (2009), Does Higher Openness Cause More Real Exchange Rate Volatility?, The World Bank Policy Research Working Paper 4896.
• Cevik, S., Harris, R. & Yilmaz, F. (2015), Soft Power and Exchange Rate Volatility, IMF Working Paper, pp.1-34.
• Chipili, J. M. (2009), Modeling Exchange Rate Volatility in Zambia. Retrieved from http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.410.4056&rep=rep1&type=pdf
• Dickey, D.A. & Fuller W.A. (1981), Distribution of The Estimators for Autoregressive Time Series with A Unit Root. Econometrica, vol.49, pp.1057-1072.
• Englama, A., Duke, O.O., Ogundiepe, T.S. & Ismail, F.U. (2010), Oil price and Exchange Rate Volatility in Nigeria: An Empirical Investigation, CBN Economic and Financial Review, vol. 48, no.3, pp.31-48.
• Giannellis, N. & Papadopoulos, A. P. (2011), What causes exchange rate volatility? Evidence from selected EMU members and candidates for EMU membership countries, Journal of International Money and Finance, vol. 30, pp. 39–61.
• Grydaki, M. & Fontas S. (2011), What Explains Nominal Exchange Rate Volatility? Evidence from the Latin American Countries, Discussion Paper Series 2010_10, Department of Economics, University of Macedonia.
• Hassan, A., Abubakar, M. & Dantama, Y. U. (2017), Determinants of Exchange Rate Volatility: New Estimates from Nigeria, Eastern Journal of Economics and Finance, vol.3, no.1, pp. 1-12.
• Insah, B. & Chiaraah, A. (2013), Sources of Real Exchange Rate Volatility in the Ghanaian Economy, Journal of Economics and Intentional Finance, vol.5, no.6, pp. 232-238.
• Johansen, S. (1988), Statistical Analysis of Cointegration Vectors, Journal of Economic Dynamics and Control”, Journal of Economic Dynamics and Control, vol.12, no.2, pp.231- 254.
• Johansen, S., & Juselius, K. (1990), Maximum likelihood estimation and inference on cointegration with application to money demand, Oxford Bulletin of Economics And Statistics, vol.52, no.2,pp.169-210.
• Khin, A. A., Yee, C. Y., Seng L. S., Wan, C. M. & Xian G. Q. (2017), Exchange Rate Volatility on Macroeconomıc Determinants In Malaysia: Vector Error Correction Method (Vecm) Model, Journal of Global Business and Social Entrepreneurship (GBSE) Vol. 3: no. 5, pp. 36–45.
• Martins, J. F. S. (2015), Impact of Real Exchange Rate Volatility on Foreıgn Direct Investment Inflows In Brazil, [Em linha]. Lisboa: ISCTE-IUL, 2015. Dissertação de mestrado. [Consult. Dia Mês Ano] Disponível em www:<http://hdl.handle.net/10071/11412>.
• Mirchandani, A. (2013), Analysis of Macroeconomic Determinants of Exchange Rate Volatility in India, International Journal of Economics and Financial Issues, vol.3, no.1, pp.172-179.
• Morana, C. (2009), On the Macroeconomic Causes of Exchange Rate Volatility, International Journal of Forecasting, vol.25, no. 2, pp. 328–350.
• Mpofu, T. (2016), The Determinants of Exchange Rate Volatility in South Africa, Economic Research Southern Africa (ERSA) Working Paper, 604.
• Oaikhenan, H. E. & Aigheyisi, O. S. (2015), Factors Explaining Exchange Rate Volatility in Nigeria: Theory and Empirical Evidence, Economic and Finacial Review, vol. 53, no.2, pp.47-77.
• Phillips, P. C. B. & Perron P. (1988), Testing For a Unit Root in Time Series Regression, Biometrika, vol.75, no. 2, pp. 335–346.
• Phillips, P. C. B. & Hansen, B. E. (1990), Statistical Inference in Instrumental Variables Regressions with I(1) Processes, Review of Economic Studies, vol.57, pp. 99-125.
• Saatçi M. & Dumrul Y. (2013). Elektrik Tüketimi ve Ekonomik Büyüme İlişkisinin Dinamik Bir Analizi: Türkiye Örneği, Uludağ Üniversitesi İktisadi ve İdari Bilimler Fakültesi Dergisi, vol.32, no.2, pp.1-24.
• Stancik, J., (2007), Determinants of Exchange Rate Volatility: The Case of the New EU members, Czech Journal of Economics and Finance, vol. 57,no.9-10,pp. 414-432.