RISK SPILLOVER AMONG FINANCIAL MARKETS: AN ANALYSIS ON TURKEY USING DYNAMIC CONDITIONAL VARIANCE AND CORRELATIONS

Abstract

The importance of risk or volatility spillover in financial markets has increased following the global crisis of 2008. It can be stated that this process becomes more pronounced, especially during periods of financial turbulence, such as shocks or crises. Given its significant impact on investor decisions and financial stability, risk spillover has been the subject of an increasing number of empirical studies in recent years. In this study, the spillover of risk or volatility in financial markets is examined through the case of Turkey. The DCC-GARCH method, which incorporates the modeling of dynamic conditional variance and correlations and is believed to yield more effective results, particularly during financial turbulence periods, has been preferred for the analyses. The study utilizes a sample covering the period 2006-2025, composed of weekly data. This dataset includes data compiled from the stock, bond, credit, foreign exchange, and gold markets. The analysis results indicate that there are strong interdependencies among financial markets in Turkey, which facilitate the transfer of not only risks but also shocks between markets. The conditional correlations gradually decline over time, suggesting that long memory effects might be strong. It has been determined that the impact of shocks on conditional correlations is weak in the short term but strong and persistent in the long run. These empirical findings demonstrate that shocks will spread rapidly and remain persistent among financial markets, regardless of whether they originate from external or local sources. In such a process, the specific financial market from which the risk or shock originates is of little importance. Regardless of the market type, the same mechanism will operate, and the transmitted shock will swiftly affect the entire system.