The CARR-volatility connectedness between USD/TRY and foreign banks in Turkey: Evidence by TVP-VAR

This study focuses on the volatility spillover between the stock prices of foreign banks having business in Turkey and the exchange rate. More particularly, it analyzes the connectedness between the USD-TRY exchange rate volatility and the foreign banks’ stock price volatility in their own country’s stock markets. We select ten foreign banks with the biggest total assets and divide them into two panels: eastern and western capitalized banks. The dataset contains weekly data from 2016-01-04 to 2022-01-17. We estimate volatilities utilizing the Conditional Autoregressive Range (CARR) model and then apply the Time-Varying Parameter- Vector Autoregressive (TVP-VAR) based Diebold–Yilmaz Connectedness Index to reveal the transition and connectedness of volatility. The total connectedness indices show that 26.72 and 54.75% of the forecast error variance originate from other assets included in the spillover analysis for eastern and western panels, respectively. We also explore net pairwise comovements and find that shocks in USD-TRY have dominated on the forecast error variance of bank stocks in the eastern panel, while it is a net volatility receiver in the western panel.