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Bond Premium in Turkey : Inflation Risk or Default Risk?

Author

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  • ERDEM BASÇI
  • MEHMET FATIH EKINCI

Abstract

In this paper we examine the difference between T-bill returns and common stock returns in Turkey. We observe that there is a bond premium in Turkey unlike the equity premia in developed countries. As an attempt to explain this surprising observation, we incorporate inflation risk and default risk to the Mehra and Presscott (1985) dynamic asset-pricing model. Calibration with reasonable parameter values indicates that the inflation risk alone is not sufficient to explain the observed bond premium. However, by allowing for the presence of a perceived default probability, we can explain the observed bond premium on Turkish T-bills over Turkish common stocks.

Suggested Citation

  • Erdem Basçi & Mehmet Fatih Ekinci, 2005. "Bond Premium in Turkey : Inflation Risk or Default Risk?," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 41(2), pages 25-40, March.
    • Handle: RePEc:mes:emfitr:v:41:y:2005:i:2:p:25-40
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    Citations

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    Cited by:

    1. Mr. Prakash Kannan, 2008. "Perspectives on High Real Interest Rates in Turkey," IMF Working Papers 2008/251, International Monetary Fund.
    2. Devpura, Neluka & Narayan, Paresh Kumar & Sharma, Susan Sunila, 2021. "Bond return predictability: Evidence from 25 OECD countries," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 75(C).
    3. Mustafa Kilinç & Zübeyir Kilinç & M. Ibrahim Turhan, 2012. "Resilience of the Turkish Economy During the Global Financial Crisis of 2008," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 48(S5), pages 19-34, November.

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