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Bond Premium in Turkey

Author

Listed:
  • Erdem Basci

    (Central Bank of the Republic of Turkey)

  • Mehmet Fatih Ekinci

    (University of Houston)

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 indicate 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 Basci & Mehmet Fatih Ekinci, 2004. "Bond Premium in Turkey," Macroeconomics 0409007, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpma:0409007
    Note: Type of Document - pdf; pages: 27
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    References listed on IDEAS

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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. Voyvoda, Ebru & Yeldan, Erinc, 2005. "Managing Turkish debt: An OLG investigation of the IMF's fiscal programming model for Turkey," Journal of Policy Modeling, Elsevier, vol. 27(6), pages 743-765, September.
    3. Markus Kirchner & Malte Rieth, 2010. "Sovereign Risk and Macroeconomic Fluctuations in an Emerging Market Economy," Tinbergen Institute Discussion Papers 10-100/2, Tinbergen Institute.
    4. 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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    More about this item

    Keywords

    Equity Premium Puzzle; Default Risk; Inflation Risk; Asset Pricing; Bond Premium.;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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