The relationship between exchange rate volatility and equity index return in the COVID-19 period

In the years following the end of the Bretton Woods System in 1973, many countries, including Turkey, adopted the floating exchange rate system. This development has led to increased volatility in the exchange rate, making it very important for investors and companies dealing with international trade. In addition, the fluctuations in the exchange rate caused risks and uncertainties. Thus, it has become a prerequisite to evaluate the relationship between the fluctuation in the exchange rate and the stock index return in order to be protected from the risk and uncertainty. The aim of this study is to examine the relationship between exchange rate volatility and stock index return. The data for the period of 11.03.2020-30.12.2021 were included in the research on a daily basis. The Enhanced Dickey Fuller (Augmented Dickey Fuller-ADF) unit root test was performed to analyze the stationarity on the series. In order to model exchange rate volatility, ARMA (2,2) model from linear stochastic models, autoregressive moving average models and EGARCH (2,2) model from Exponential generalized autoregressive conditional variable variance (GARCH) models were estimated. Granger causality test was applied to determine the causal relationship between exchange rate volatility and stock index return. As a result of the analysis, it was determined that the variables were stationary at the level and a bidirectional causality relationship was determined between exchange rate (USD/TRY) volatility and stock index return (BIST100).