Geopolitical Risk, Policy Uncertainty, and Financial Volatility in Türkiye: A Dynamic Connectedness Analysis Using the TVP-VAR

Abstract

This research analyzes the dynamic interaction among Geopolitical Risk, Economic Policy Uncertainty, XU100 return, and USD/TRY using the TVP-VAR method. Within the scope of the study, volatility spillovers are examined using a dataset representing a broad period between 01.03.2006 and 01.12.2024. According to the research findings, the connectedness among Geopolitical Risk, Economic Policy Uncertainty, XU100 return volatility, and USD/TRY volatility in Türkiye was observed at a low level before the 2008 global financial crisis. However, it peaked during the global financial crisis and returned to pre-crisis levels afterward. On the other hand, contrary to the claims frequently emphasized in the literature, total connectedness did not increase sharply during the Covid-19 pandemic. According to the Network Plot findings, Geopolitical Risk and the USD/TRY exchange rate are the most dominant variables in the system, while EPU is identified as the largest shock receiver. The results indicate that the exchange rate plays a decisive role in financial markets in Türkiye, that geopolitical risks act as an exogenous force triggering economic uncertainty, and that both the BIST100 index and Economic Policy Uncertainty assume a net shock-absorbing position in response to these shocks.