Exchange rate volatility modelling and forecasting: An application on Turkish Economy

In recent years, volume of international trade has increased due to the globalization. At this point, managing the exchange rate risk has become very important for countries and companies. In this context, the necessity of using exchange rate volatility modeling and forecasting methods has become more widespread in recent scientific studies. Therefore, this diploma thesis investigates impact of the exchange rate volatility on the Turkish economy and to what extent do the political events contributed to the exchange rate volatility in Turkey. In relation to that, logarithmic values of USD/TRY have been modeled between 12/04/2018 and 15/04/2019 with the help of autoregressive integrated moving average and autoregressive conditional heteroskedasticity models in order to determine most appropriate time series model for volatility. After most appropriate model has been found, the exchange rates USD/TRY between 01/04/2019 and 19/04/2019 were forecasted and compared with actual values. In conclusion, it is important to mention that forecasting results were quite close to present results, but it is also necessary to point out that political situation in the country has big impact on the volatility of exchange rate USD/TRY.