Beta-T Models for Exchange Rate Volatility Modelling: An Evaluation on the US Dollar / Turkish Lira Exchange Rate

Abstract

To compare different risk measurement methods, in this study, the US Dollar, which is important in terms of being one of the most preferred investment instruments in Turkey and being a reserve currency, is under review. First, EGARCH (1,1) and GJR-GARCH (1,1) models were estimated using the return data based on the US Dollar / Turkish Lira exchange rate for the 2005 -2021 period. Then, the "Beta-t-EGARCH and Its Variants", which have been introduced in recent years, fit well with the characteristics of the exchange rate series and, most importantly, are robust to extreme values and jumps in volatility have been estimated with the expectation of being able to calculate the exchange rate risk more accurately. As a result, it was determined that the model that best met the purpose of the study was the "Two-Component Beta-Skew-t-EGARCH Model with Leverage". The study is important because it draws attention to the effect of extreme values and fluctuations in the Turkish foreign exchange market volatility.