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Bank of America (BofA) released a report analyzing the Turkish lira’s volatility sensitivity in the wake of the currency’s volatility shock in late March. The bank’s research sought to determine whether the market perceives this as a lasting structural shift or a temporary fluctuation.
BofA’s findings suggest that there has been a lasting increase in the sensitivity of implied volatility to changes in foreign exchange (FX)-implied yields for the Turkish lira.
The analysis involved regressing three-month FX-implied Turkish lira yields on three-month at-the-money (ATM) implied volatility from October 2023 to April 2025. This regression controlled for the Volatility Index (VIX) to isolate domestic volatility shocks.
The results, as depicted in Exhibit 1 of the report, indicated that the volatility shock on March 19 was particularly severe, ranking in the 98th percentile of all daily increases. This suggests a potential shift in the market’s approach to Turkish lira volatility.
To put the recent volatility shock into perspective, BofA compared it to similar events in the past. The analysis reviewed the period from December 2018 to December 2020, identifying significant changes in volatility sensitivity following a rate cut by the Central Bank of the Republic of Turkiye (CBRT) in January 2020.
After this event, the sensitivity of volatility to FX-implied yields showed a clear deviation from its previous pattern, with greater variance in the betas, indicating a structural shift rather than a transient one.
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