Global Uncertainty and Exchange Rate Volatility

Abstract

This paper investigates the impact of global uncertainty on Turkey's exchange rate volatility via quantile regression approach. Using quantile regression approach, estimated uncertainty coefficients are allowed to differ over quantiles of the exchange rate volatility. The EGARCH model is the best fit for measuring exchange rate volatility due to the fact that exchange rate series exhibit "asymmetric volatility". In this study we employed global economic policy uncertainty index-GEPU constructed by Baker et al. ( 2013) as a proxy of global uncertainty. Empirical results suggest that higher volatility of exchange rate is associated with a greater positive shock of GEPU. However, estimated parameters are statistically significant at lower exchange rate volatility since the CBRT intervenes the foreign exchange markets and restricts the excessive fluctuations in exchange rates to achieve financial stability.