Bond Premium in Turkey
AbstractIn 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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Bibliographic InfoPaper provided by EconWPA in its series Macroeconomics with number 0409007.
Length: 27 pages
Date of creation: 06 Sep 2004
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Note: Type of Document - pdf; pages: 27
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Equity Premium Puzzle; Default Risk; Inflation Risk; Asset Pricing; Bond Premium.;
Other versions of this item:
- 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
This paper has been announced in the following NEP Reports:
- NEP-CFN-2004-09-12 (Corporate Finance)
- NEP-CWA-2004-09-12 (Central & Western Asia)
- NEP-FMK-2004-09-12 (Financial Markets)
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