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Bond Premium in Turkey : Inflation Risk or Default Risk?

Erdem Başçι, Mehmet Fatih Ekinci

Open publisher page 15 citations

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 indicates 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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What this paper is about

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 indicates 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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OpenAlex reports 15 citations for this work. Citation counts describe recorded attention and do not establish research quality.

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Available 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 indicates 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.

Key concepts: Bond, Risk premium, Economics, Econometrics, Capital asset pricing model, Stock (firearms), Financial economics, Inflation (cosmology)

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