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Risk Aversion, Sovereign Bonds and Risk Premium

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  • Ferhan Salman

Abstract

This paper analyzes the risk premium associated with sovereign bonds. We use the Generalized Method of Moments to estimate the level of risk aversion that is implied by the demand for such bonds. We show that although sovereign bonds offer comparable returns to those of US Equities they command higher risk premiums. Second, we observe that in contrast to what is suggested by theory, risk aversion parameters differ for each country. We name this observation �The Sovereign Bond Premium Puzzle.� Moreover, we present that, as oppose to ones intiution, country fundamentals and default probability are not answers for this variation.

Suggested Citation

  • Ferhan Salman, 2005. "Risk Aversion, Sovereign Bonds and Risk Premium," Working Papers 0514, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    • Handle: RePEc:tcb:wpaper:0514
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    File URL: https://www.tcmb.gov.tr/wps/wcm/connect/EN/TCMB+EN/Main+Menu/Publications/Research/Working+Paperss/2005/05-14
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    References listed on IDEAS

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    6. Juan Jose Cruces & Marcos Buscaglia & Joaquin Alonso, 2002. "The Term Structure of Country Risk and Valuation in Emerging Markets," Working Papers 46, Universidad de San Andres, Departamento de Economia, revised Apr 2002.
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    10. Mehra, Rajnish & Prescott, Edward C., 2003. "The equity premium in retrospect," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 14, pages 889-938, Elsevier.
    11. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 50(5), pages 1269-1286, September.
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    Cited by:

    1. Tiryaki, S. Tolga, 2014. "Sectoral asymmetries in a small open economy," Economic Modelling, Elsevier, vol. 43(C), pages 465-475.
    2. S. Tolga Tiryaki, 2010. "Interest Rates and Real Business Cycles in Emerging Markets (Yukselen Piyasalarda Faiz Oranlari ve Reel Is Cevrimleri)," Working Papers 1008, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    3. International Monetary Fund, 2010. "Former Yugoslav Republic of Macedonia: Selected Issues for the 2009 Article IV Consultation," IMF Staff Country Reports 2010/020, International Monetary Fund.

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