Beyond GARCH: Intraday insights into the exchange rate and stock price volatility dynamics in Borsa Istanbul sectors

Abstract

This study investigated the impact of exchange rate volatility on sectoral stock

volatility by employing the intraday volatility measure directly calculated from the

original data, using daily data from 27 Borsa Istanbul sectors between April 29,

2003, and April 25, 2023. In the literature, GARCH models are commonly used to

study the volatility spillovers between exchange rates and stock prices, typically

using aggregate data. However, the GARCH family models provide inefficient and

biased estimates if they are misspecified. Moreover, using aggregate-level data may

lead to biased and misleading conclusions. The research used intraday volatility

measures to overcome the shortcomings of GARCH models. The ordinary least

squares (OLS), GARCH (1,1) methods, and Garman and Klass (1980) volatility

estimator are used. The empirical results showed that the estimates from each

method vary significantly, and these disparities in the results might be due to

misspecification in GARCH (1,1) models. The intraday volatility model estimation

results showed that although stock price volatilities in all sectors are positively and

significantly affected by exchange rate volatility, their magnitudes vary

significantly. Taken together, this implies the presence of vast heterogeneities in

the responses of sectoral stock price volatilities to exchange rate volatility. The

results encourage policymakers to pay special attention to these heterogeneities to

prevent capital flights and underinvestment. Additionally, the findings assist

investors in making more effective decisions by helping them adapt their

investment strategies to factor in exchange rate fluctuations and mitigate the impact

of unexpected events in the exchange rate marke