The policy challenge with floating exchange rates: Turkey's recent experience

This paper evaluates the developments in the Turkish economy in light of the Central Bank of Turkey's (CBT) policies during a recent period of floating exchange rate system (March 2001-July 2003). It is found that the CBT was effective in containing volatility and reducing the average inflation rate while there was a strong recovery of output. However, there are accumulated risks in the economy. Particularly, the extreme appreciation of the Turkish lira during this period and the record level of real interest rates give the impression that the current state of the economy is fragile. Unless the government accelerates the structural reform process and pursues sound fiscal policies to reduce the public sector borrowing requirement and the debt ratio, an adverse shock to the system may trigger a reversal of fortune. © 2005 Springer Science + Business Media, Inc

Financial earthquakes, aftershocks and scaling in emerging stock markets

This paper provides evidence for scaling laws in emerging stock markets. Estimated parameters using different definitions of volatility show that the empirical scaling law in every stock market is a power law. This power law holds from 2 to 240 business days (almost 1 year). The scaling parameter in these economies changes after a change in the definition of volatility. This finding indicates that the stock returns may have a multifractal nature. Another scaling property of stock returns is examined by relating the time after a main shock to the number of aftershocks per unit time. The empirical findings show that after a major fall in the stock returns, the stock market volatility above a certain threshold shows a power law decay, described by Omori's law. © 2003 Elsevier B.V. All rights reserved

Seigniorage, currency substitution, and inflation in Turkey

[No abstract available

Learning to live with the float: Turkey's experience 2001-2003

The conduct of policy under floating exchange rates is becoming an increasingly important concern for developing countries. The challenge facing the central banks is to contain the volatility of the exchange rate while achieving lowinflation and stimulating output growth. As a complement, the governments must implement sound policies to bring the fiscal and legal environments close to those of the advanced economies so as to enhance long-term economic growth. One recent example of an emerging economy that confronts this challenge is Turkey with a history of high inflation and a collapse of a fixed exchange rate based stabilization program that resulted in a marketforced devaluation. After a review of the literature, this chapter analyzes the developments in the foreign exchange market in Turkey in light of the Central Bank's policies during the floating exchange rate system between February 2001 and November 2003. The results indicate that the Central Bank had been successful in containing volatility and reducing the average inflation rate. However, the accumulated risks in the economy, such as the extreme appreciation of the currency and high real interest rates make the system vulnerable to adverse shocks. © 2009 by Nova Science Publishers, Inc. All rights reserved

Intraday dynamics of stock market returns and volatility

This paper provides new empirical evidence for intraday scaling behavior of stock market returns utilizing a 5 min stock market index (the Dow Jones Industrial Average) from the New York Stock Exchange. It is shown that the return series has a multifractal nature during the day. In addition, we show that after a financial "earthquake", aftershocks in the market follow a power law, analogous to Omori's law. Our findings indicate that the moments of the return distribution scale nonlinearly across time scales and accordingly, volatility scaling is nonlinear under such a data generating mechanism. © 2006 Elsevier B.V. All rights reserved

Overnight borrowing, interest rates and extreme value theory

We examine the dynamics of extreme values of overnight borrowing rates in an inter-bank money market before a financial crisis during which overnight borrowing rates rocketed up to (simple annual) 4000 percent. It is shown that the generalized Pareto distribution fits well to the extreme values of the interest rate distribution. We also provide predictions of extreme overnight borrowing rates using pre-crisis data. The examination of tails (extreme values) provides answers to such issues as to what are the extreme movements to be expected in financial markets; is there a possibility for even larger movements and, are there theoretical processes that can model the type of fat-tails in the observed data? The answers to such questions are essential for proper management of financial exposures and laying ground for regulations. © 2005 Elsevier B.V. All rights reserved

High volatility, thick tails and extreme value theory in value-at-risk estimation

In this paper, the performance of the extreme value theory in value-at-risk calculations is compared to the performances of other well-known modeling techniques, such as GARCH, variance-covariance (Var-Cov) method and historical simulation in a volatile stock market. The models studied can be classified into two groups. The first group consists of GARCH(1, 1) and GARCH(1, 1)- t models which yield highly volatile quantile forecasts. The other group, consisting of historical simulation, Var-Cov approach, adaptive generalized Pareto distribution (GPD) and nonadaptive GPD models, leads to more stable quantile forecasts. The quantile forecasts of GARCH(1, 1) models are excessively volatile relative to the GPD quantile forecasts. This makes the GPD model be a robust quantile forecasting tool which is practical to implement and regulate for VaR measurements. © 2003 Elsevier B.V. All rights reserved

Multiscale systematic risk

In this paper we propose a new approach to estimating systematic risk (the beta of an asset). The proposed method is based on a wavelet multiscaling approach that decomposes a given time series on a scale-by-scale basis. The empirical results from different economies show that the relationship between the return of a portfolio and its beta becomes stronger as the wavelet scale increases. Therefore, the predictions of the CAPM model should be investigated considering the multiscale nature of risk and return. © 2004 Elsevier Ltd. All rights reserved

Scaling properties of foreign exchange volatility

In this paper, we investigate the scaling properties of foreign exchange volatility. Our methodology is based on a wavelet multi-scaling approach which decomposes the variance of a time series and the covariance between two time series on a scale by scale basis through the application of a discrete wavelet transformation. It is shown that foreign exchange rate volatilities follow different scaling laws at different horizons. Particularly, there is a smaller degree of persistence in intra-day volatility as compared to volatility at one day and higher scales. Therefore, a common practice in the risk management industry to convert risk measures calculated at shorter horizons into longer horizons through a global scaling parameter may not be appropriate. This paper also demonstrates that correlation between the foreign exchange volatilities is the lowest at the intra-day scales but exhibits a gradual increase up to a daily scale. The correlation coefficient stabilizes at scales one day and higher. Therefore, the benefit of currency diversification is the greatest at the intra-day scales and diminishes gradually at higher scales (lower frequencies). The wavelet cross-correlation analysis also indicates that the association between two volatilities is stronger at lower frequencies

Informed traders’ arrival in foreign exchange markets: Does geography matter?

This article critically investigates the possibility that private information offering systematic profit opportunities exists in the spot foreign exchange market. Using a unique dataset with trader-specific limit and market order histories for more than 10,000 traders, we detect transaction behavior consistent with the informed trading hypothesis, where traders consistently make money. We then work within the theoretical framework of a high-frequency version of a structural microstructure trade model, which directly measures the market maker’s beliefs. Both the estimates of the trade model parameters and our model-free analysis of the data suggest that the time-varying pattern of the probability of informed trading is rooted in the strategic arrival of informed traders on a particular day-of-week, hour-of-day, or geographic location (market). © 2015, Springer-Verlag Berlin Heidelberg