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Market-Based Measurement of Expectations on Short-Term Rates in Turkey

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  • Ibrahim Burak Kanli

Abstract

This paper aims to serve two purposes. First, it evaluates the ability of various financial market instruments to capture market expectations on short-term rate. Second, it proposes an alternative approach to obtain estimates of term premium inherent in alternative returns. Empirical results reveal that Turkish lira (TRY) returns implied by USD/TRY forward rates dominate all other return types for predicting the overnight interbank repo rate, followed by TRY interbank bid rate. Moreover, these return types are found to contain the lowest and least volatile term premium. However, forecasting ability of returns declines significantly with the introduction of the new policy framework by the Central Bank of Turkey, which utilizes “controlled degree of uncertainty” in o/n rates as an additional tool. In the recent period TRY interbank bid and ask rates stand out as returns with the highest ability to represent market expectations.

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Bibliographic Info

Paper provided by Research and Monetary Policy Department, Central Bank of the Republic of Turkey in its series Working Papers with number 1305.

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Date of creation: 2013
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Handle: RePEc:tcb:wpaper:1305

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Keywords: Monetary policy; expectations on short-term rate; market-based measures of expectations; term premium;

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