This paper aims to examine how different dimensions of Federal Reserve monetary policy communication affect financial market volatility in Türkiye, distinguishing between dovish and hawkish forward guidance and target versus path policy shocks.
Using daily data from January 27, 2010 to July 22, 2021, two complementary econometric models are used: an exponential generalized autoregressive conditional heteroskedasticity (EGARCH) model to capture asymmetric volatility responses in individual Turkish asset returns and a dynamic conditional correlation-generalized autoregressive conditional heteroskedasticity (DCC-GARCH) model to examine time-varying correlations between communication surprises and exchange rates, government bond yields and stock returns.
Fed communication has significant and heterogeneous effects on Turkish financial markets. Forward guidance, particularly hawkish signals, generates stronger volatility responses than target or path shocks, with the magnitude and direction of effects varying across asset classes.
Policymakers in emerging economies should carefully monitor both the content and tone of Fed communication, as different policy signals transmit through multiple channels and produce asymmetric effects across financial markets.
This study contributes to the literature by simultaneously capturing asymmetric volatility responses and time-varying correlations using complementary EGARCH and DCC-GARCH frameworks, offering novel evidence on how the tone and type of Fed communication differentially affect an emerging market economy.
