Bond Premium in Turkey

Erdem Basci and Mehmet Fatih Ekinci ()
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Erdem Basci: Central Bank of the Republic of Turkey

Macroeconomics from EconWPA

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.

Keywords: Equity Premium Puzzle; Default Risk; Inflation Risk; Asset Pricing; Bond Premium. (search for similar items in EconPapers)
JEL-codes: E21 E31 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn, nep-cwa and nep-fmk
Date: Written 2004-09-06
Note: Type of Document - pdf; pages: 27
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