Modeling the exchange rate volatility with econometric methods and an analysis of relationship between defined model and the ISE 100 index

First aim of conducting this study is to model the exchange rate volatility in Turkish economy, where it has been adopted floating rate regime after the February 2001 crisis. And second aim is to analyze the relationship between the exchange rate volatility and the Istanbul Stock Exchange (ISE) 100 Index.Within the scope of this study an exchange rate basket has been established and an analysis has been carried on with the return rates of this exchange rate basket for the period of 02/01/2002 and 31/12/2010. As Autoregressive Conditional Heteroscedastic (ARCH) and Generalized ARCH (GARCH) models underpin the methods that have been pursued in this study, Vektor Autoregressive (VAR) Analysis is another econometric method that has been used. Relationship between estimated exchange rate volatility and ISE 100 Index has been examined by VAR Analysis method.Being in line with the desired aims, this study came through with two important conclusions: It has been determined that exchange rate returns have conditional heteroscedastic variance for the Turkish economy in the questions period. The volatility has been modeled with the GARCH (1,1) Model, which has been proved efficient by the previous studies. Long term volatility has been computed as of 1,67 percent via long term conditional variance. The other striking conclusion of the study is that turbulent moves in the ISE 100 Index cause volatility on the exchange rates. Given shocks to ISE 100 Index negatively affect the exchange rates and return of exchange rate back to its equilibrium path is being achieved in longer time span.