A Financial Connectedness Analysis for Turkey

Ferhat Camlica, Didem Gunes and Etkin Ozen

Working Papers from Research and Monetary Policy Department, Central Bank of the Republic of Turkey

Abstract: This paper investigates the structure of financial connectedness in Turkey between 2002 and 2017 by using the Diebold and Yilmaz variance decomposition method. We aim to uncover financial connectedness among major subcomponents in Turkish financial markets, and whether there has been a change in directional connectedness over time, and which markets were shock senders and receivers. Our results of average analysis show that the equity market is the highest net stress contributor, followed by money and foreign exchange markets, while bond and banking markets are net receivers. Our dynamic spillover analysis indicates that during heightened volatility periods, net sources of stress are mainly equity, foreign exchange, and, in a lesser context, the bond markets. On the other hand, the banking sector is a net receiver of financial stress. The dynamic analysis also indicates that the spillover index for the Turkish financial markets was at its highest during the financial stress episode starting in mid-2013 and ending in mid-2014, followed by 2006 FED tightening period and idiosyncratic domestic shocks. Spillover spikes in other well-known episodes tended to remain lower, which can also be attributed to Turkish macroeconomic policy regime aiming to mitigate external and domestic shocks. Finally, the policymaking bodies responsible for macroprudential oversight in Turkey are broadly capable of monitoring and evaluating financial market spillover dynamics.

Keywords: Spillovers; Systemic stress; Connectedness analysis; Vector autoregression; Variance decomposition (search for similar items in EconPapers)
JEL-codes: C53 E44 F42 (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-ara and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:tcb:wpaper:1719

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