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An empirical decomposition of the liquidity premium in breakeven inflation rates

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  • Güler, Mustafa Haluk
  • Keleş, Gürsu
  • Polat, Tandoğan

Abstract

In this paper, we propose a novel way to calculate the relative liquidity premium between the nominal and inflation-indexed government bonds. We assume that both nominal and inflation-indexed bonds contain liquidity premium. Moreover, the methodology that is used in the paper does not need survey data to extract changes in the long-run inflation expectations. Hence, we can report the changes in the long-run inflation expectations on a daily basis. We apply this methodology to the Turkish bond market data. Results of the paper indicate the existence of a relative liquidity premium that takes values between -31 basis points and 43 basis points for the period between October 2012 and November 2015. This result also shows that the inflation-indexed bonds sometimes can be more liquid than nominal bonds in Turkey.

Suggested Citation

  • Güler, Mustafa Haluk & Keleş, Gürsu & Polat, Tandoğan, 2017. "An empirical decomposition of the liquidity premium in breakeven inflation rates," The Quarterly Review of Economics and Finance, Elsevier, vol. 63(C), pages 185-192.
    • Handle: RePEc:eee:quaeco:v:63:y:2017:i:c:p:185-192
    DOI: 10.1016/j.qref.2016.04.002
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    2. Orlowski, Lucjan T. & Soper, Carolyne, 2019. "Market risk and market-implied inflation expectations," International Review of Financial Analysis, Elsevier, vol. 66(C).

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    More about this item

    Keywords

    Breakeven inflation; Inflation expectations; Liquidity premium; Inflation risk premium; C32; E31; E43; E52; G12;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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