Turkish foreign exchange market microstructure and the volatility spillover

Our study is aimed to analyse volatility in Turkish foreign exchange market, to examine volatility spillover between foreign exchange, national and foreign stock exchange markets, to specify the microstructural features which explain volatility and volatility spillover between the markets mentioned above, and to present the validity of volatility spillover andmicrostructure approach in Turkish foreign exchange market. Microstructure analysis, used in our research study, consists of theoretical study and survey analysis related to behaviour of market players. The survey is aimed to analyse the microstructure of Turkish foreign exchange market and is applied to dealers who are authorized to deal in interbank foreign exchange market. The survey findings show that the Turkish foreign exchange market has similar features with the developed countries? foreignexchange markets in the areas of determination of spreads, effects of speculation and central bank interventions, existence of dominant players and the importance of using order flows in forecasting exchange rates in the short term. Yet, the survey findings display that differences exist due to the fact that the liquidity of Turkish foreign exchange market is lower compared to the developed countries?. In our study, in order to analyze volatility, German, American and Istanbul stock exchange markets indexes and TL/$ and TL/? nominal foreign exchange rates data were used for the period of 2001-2009. The existence of volatility spillover and the persistency of spillover effect are questioned in this study, where multivariate GARCH models are used. According to our results, there is volatility spillover between TL/$ and TL/? foreign exchange, German and American stock exchange markets while there is no volatility spillover between TL/$ and Istanbul stock exchange market. It is also established that there is volatility spillover between TL/? and the all markets.