Time Series Dynamics of Short Term Interest Rates in Turkey

Abstract

Interest rate functions as the cornerstone for the heavy majority of the financial models. The high volatility in interest rates in the financial crisis of 2008/09 and resulting increased uncertainty led many researchers to focus on modeling the dynamics of changes in short term interest rates. This study aims to analyze the volatility of short-term interest rate in Turkey in terms of overnight repo rate and to forecast this rate for the next six months by modelling this volatility. For this purpose, the ARCH family models like ARCH, GARCH and EGARCH were preferred to use since they are the most common methods in the literature. Using the weekly frequency data for the period of January 2002 - January 2021, the model that best describes the stochastic volatility in the data was found to be the GARCH (1.1) model. As a result of the fact that the in-sample estimates were found sufficient, the interest rate estimates for the next 6 months were realized.