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Bond Premium in Turkey

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Author Info

  • 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.

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File URL: http://128.118.178.162/eps/mac/papers/0409/0409007.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0409007.

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Length: 27 pages
Date of creation: 06 Sep 2004
Date of revision:
Handle: RePEc:wpa:wuwpma:0409007

Note: Type of Document - pdf; pages: 27
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Web page: http://128.118.178.162

Related research

Keywords: Equity Premium Puzzle; Default Risk; Inflation Risk; Asset Pricing; Bond Premium.;

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References

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  1. Cochrane, John H. & Campbell, John, 1999. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Scholarly Articles 3119444, Harvard University Department of Economics.
  2. Andrew Ang & Geert Bekaert & Jun Liu, 2000. "Why Stocks May Disappoint," NBER Working Papers 7783, National Bureau of Economic Research, Inc.
  3. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
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  9. Benartzi, Shlomo & Thaler, Richard H, 1995. "Myopic Loss Aversion and the Equity Premium Puzzle," The Quarterly Journal of Economics, MIT Press, vol. 110(1), pages 73-92, February.
  10. Chris I. Telmer, 1991. "Asset Pricing Puzzles and Incomplete Markets," Working Papers 806, Queen's University, Department of Economics.
  11. Sylla, Richard & Wallis, John Joseph, 1998. "The anatomy of sovereign debt crises: Lessons from the American state defaults of the 1840s," Japan and the World Economy, Elsevier, vol. 10(3), pages 267-293, July.
  12. Campbell, John Y., 1999. "Asset prices, consumption, and the business cycle," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 19, pages 1231-1303 Elsevier.
  13. Drudi, Francesco & Giordano, Raffaela, 2000. "Default risk and optimal debt management," Journal of Banking & Finance, Elsevier, vol. 24(6), pages 861-891, June.
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  16. Hernandez-Trillo, Fausto, 1995. "A model-based estimation of the probability of default in sovereign credit markets," Journal of Development Economics, Elsevier, vol. 46(1), pages 163-179, February.
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Cited by:
  1. 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, M.E. Sharpe, Inc., vol. 48(S5), pages 19-34, November.
  2. Prakash Kannan, 2008. "Perspectiveson High Real Interest Rates in Turkey," IMF Working Papers 08/251, International Monetary Fund.

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